Debt Avalanche

What is the debt avalanche?

The debt avalanche is a debt payoff method where you pay the minimum on every debt, then put all extra money toward the debt with the highest interest rate. When that debt is paid off, you move its payment to the debt with the next highest rate. Because it attacks the most expensive debt first, it generally costs the least in total interest.

Key takeaways

• Debts are ordered by interest rate, highest to lowest, regardless of balance.
• Freed-up payments roll into the next debt, just like the debt snowball.
• It usually saves the most money and can shorten the overall payoff time.
• The first debt paid off may take a while if it has a large balance, which can make it harder to stay motivated.

How the debt avalanche works

1. List every debt from highest APR to lowest.
2. Pay the minimum payment on all of them.
3. Put every extra dollar toward the debt with the highest rate.
4. When it's paid off, add its old payment to the minimum on the next highest rate.
5. Repeat until everything is paid.

Hypothetical example: You have three debts and $200 a month beyond your minimums.

• Credit card: $4,000 balance at 24% APR
• Store card: $600 balance at 18% APR
• Car loan: $7,000 balance at 7% APR

With the avalanche, the extra $200 goes to the credit card first, even though the store card has a smaller balance. Every dollar sent to the 24% card stops that dollar from costing 24% a year. Once the card is paid off, its full payment rolls to the store card, and then everything rolls to the car loan.

The snowball would have targeted the $600 store card first. You'd get a faster first win, but the $4,000 balance would keep building interest at 24% in the meantime. That's why the avalanche usually comes out ahead on total interest, especially when there's a big gap between your highest and lowest rates.

Compare both orders with your real numbers in the debt payoff calculator.

Why it matters for your Money Type

Priceless Tay uses 4 Money Types to point people toward the right first fix. The debt avalanche fits the Strategist, the type who already has a working plan and wants to make it more efficient. Strategists tend to be comfortable with a slower first payoff if the math says it saves money, and they're likely to track progress in dollars of interest avoided rather than accounts closed. For a Strategist, the next question is often whether extra money should go to debt or investing, which the debt vs. invest calculator can help answer.

Spenders, who run on quick wins, and Scramblers, who need one simple target when money is tight, may stick with the snowball more easily. A payoff plan only works if you keep following it.

Common questions

Does the debt avalanche save more money than the snowball?

Generally, yes. Paying off the highest interest rate first reduces the total interest you pay, assuming you put the same amount toward debt each month. If your debts have similar rates, the savings may be small.

What if my highest rate debt has a huge balance?

The avalanche still targets it first, which can mean months before you close your first account. Some people handle this by paying off one very small debt quickly for momentum, then switching to the avalanche order.

Does a 0% promotional rate change the order?

A debt at 0% goes to the bottom of the list while the promotion lasts. Check when the promotional period ends and what the rate becomes afterward, since that can move the debt up the list later.

Should I use the avalanche for student loans and car loans too?

You can include any debt with an interest rate. Many people focus the avalanche on high-rate consumer debt first, since low-rate loans usually end up last in the order anyway.