What is the debt avalanche method?

The debt avalanche method is a strategy for paying down debt by eliminating balances with the highest interest rates first. It is a debt repayment strategy designed to minimise the total interest paid over time.

With this payoff strategy, you make minimum monthly payments on all your debts but pay extra toward your debt with the highest interest rate until it’s gone. You then apply your minimum payment from the eliminated debt plus more, if you can spare it, to the balance that carries the next-highest rate, and so on. This is how the debt avalanche method works: by systematically prioritising and paying off high-interest debts first, you reduce the overall interest you pay.

Compared with other debt paydown strategies, the debt avalanche method has the potential to save you the most money by limiting costly interest charges, especially by targeting interest debt. Here’s how to make it work for you, with the ultimate goal of paying off debt altogether.

How the debt avalanche method works

The debt avalanche method prioritises paying off your most expensive debts first, allowing you to earn returns on your money more quickly. Think of it this way: Say you have a student loan that carries a 6.8% interest rate annually. When you pay it off, your budget earns back the equivalent of that interest since you’re no longer making payments on the debt. By making extra payments toward the debt with the highest interest rate, you can accelerate the process and reduce the total amount you pay.

Loans and credit cards generally collect interest on top of the principal balance you’ve borrowed, or on top of the credit card charges you’ve made, as a fee for borrowing money. Taking on debt can end up being far more expensive than you initially planned, primarily because of compound interest. That means that as interest is added to your debt, further charges are calculated based on the new, larger total. Your minimum payment may not be sufficient to cover all the interest that has accumulated over time. Making extra payments can help reduce your total interest and lower your interest payments over the life of the debt.

When you eliminate debts using the debt avalanche method, you halt the growth of compound interest and save money on interest, thereby reducing the total interest paid and the amount of money owed in interest by targeting those debts with the highest interest rates first.

How to Pay Off Debt Using the Avalanche Method

Here’s an example of what the debt avalanche strategy—a debt repayment strategy—could look like. Let’s say you have multiple debts: three credit card balances (€8,000 at 15% APR; €3,000 at 18% APR; and €5,000 at 20% APR), plus a car loan and a personal loan. These may include larger debts or balances, and some may have higher interest rates or the highest interest debt.

If you make only the monthly minimums or the minimum required payment on each debt—which are typically calculated as 1% to 4% of your outstanding balance—you could pay almost €9,000 in interest, and you wouldn’t be debt-free for nearly 12 years.

Using the debt avalanche strategy, you’d pay off the €5,000 credit card balance first—this is your first debt and your highest interest debt—even though it’s not the largest, because it has the highest interest rate. You focus as much money, extra money, or more money toward this debt to pay it off faster. Once this debt is paid, you move on to the next debt with the highest interest rate, such as the €3,000 balance at 18% APR. After that debt is paid, you apply its monthly payment to the final €8,000 balance, which may be one of your larger balances.

By allocating extra money or more money toward your highest-interest debt, you are saving money, reducing total interest, and minimising interest payments. Interest savings will add up. You’ll save almost €3,000 in interest alone by paying off your first €5,000 balance in 12 months, rather than the nearly 12 years it would take when paying only the minimum. This approach to debt repayment helps you pay off the debt faster and achieve financial freedom while saving money on interest.

Is the debt avalanche better than the debt snowball method?

A drawback of the debt avalanche method, as illustrated in our example, is that your first balance may seem overwhelming to eliminate. Paying off €5,000 to start might seem like a steeper hill to climb than paying off €3,000, especially since larger debts can feel discouraging. The debt snowball method, on the other hand, focuses on paying off smaller debts or the smallest debt first, allowing you to achieve a quick win and build momentum.

The debt snowball method is an alternative that can help you feel successful faster. This strategy recommends paying off your smallest debt or smallest debts first, regardless of the interest rate. By targeting small debts, smaller balances, or the lowest balance, you can achieve a quick win and see progress early. While you won’t see the same interest savings over time, the psychological benefit of a quick win can keep you motivated, with the snowball rolling as you pay off each smaller debt and move on to the next.

In our example, you’d pay off the €3,000 balance first because it’s the smallest debt, then move on to the €5,000 balance, and finally the €8,000 balance. The €8,000 debt is the last one to tackle in both scenarios because it’s the largest and has the lowest interest rate. However, using the debt snowball might give you more encouragement early on—and help you reach the finish line with a series of quick wins.

An even bigger drawback of the debt snowball, though, is that you’ll save less money.

That makes the debt avalanche method a superior strategy over the debt snowball method.

However, there is no right or wrong answer when choosing between these methods—the right strategy depends on your personal preferences, motivation, and financial goals.

For instance, tackling the €3,000 balance in 12 months rather than the nearly 10 years it would take while making minimum payments would save you about €1,370. That’s a significant amount, but it’s less than half what you’d save if you used the debt avalanche method at the first stage in the process. Many industry experts recommend aligning your debt repayment approach with your financial goals to ensure long-term success.

A repayment strategy that gives you control

The most significant upside to using a method like the debt avalanche is that it puts you in more control of your finances.

When you make a plan, you’ll familiarise yourself with the ideas of minimum payments, interest rates and payoff timelines.

You’ll do the work to gain an understanding of your debt, and possibly create a debt repayment plan, which is nearly as effective as making the payments to eliminate it. As part of your plan, building a small emergency fund is vital to help you handle unexpected expenses and avoid taking on new debt while paying down the debt avalanche. The debt avalanche method is a framework that can help you regain control—and save you money along the way, especially by prioritising paying down debt, such as high-interest credit card debt, first.