Debt Avalanche Method
The debt avalanche is a method of credit card debt repayment which focuses attention on repayment of debt with the highest interest first. Once you’ve paid the highest interest you move onto the second highest interest and continue to move down the list until all debt have been paid. You also apply all prior payments from paid off debt to the next debt essentially creating an avalanche.
This method makes the most mathematical sense since you are focused on eliminating debt with the highest interest rate thus lowering the cost of the debt. However, math aside, motivations are quite different.
How to Use the Debt Avalanche Method
- List all your debts with the highest interest rates in descending order.
- Focus on repayment of the debt with the highest interest rate first while making minimum payments on the other debts.
- Apply the payments from the first debt (now paid off) to the next debt (row 2) and so on.
Credit Card 1 – $5,000 – 20.99% – $89
Credit Card 2 – $6,300 – 14.99% – $121
Credit Card 3 – $500 – 9.99% – $20
In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $89 and add to the minimum payment of credit card #2. This would become a payment of $210. You can choose to add more to the payment as well. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once done paying off credit card #2, you would then use the payments from #1 ($89) #2 ($121) and #3 ($20) to make the monthly payment on credit card #3. After strict adherence you’ll find you’ve avalanched your way out of debt.