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 balance of the highest interest card you move onto the second-highest interest and so on.
With this method, you’ll continue to move down the list until all debt has been paid. Similar to the debt snowball method, you will use all prior payments from paid off debt to the next debt. This essentially creates 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, your motivations might require a different method such as debt snowball.
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.
- Use the payments from the first debt (now paid off) to the next debt (row 2) and so on.
Credit Card 1 – $5,000 Balance – 20.99% – $89 Minimum Payment
Credit Card 2 – $6,300 Balance – 14.99% – $121 Minimum Payment
Credit Card 3 – $500 Balance – 9.99% – $20 Minimum Payment
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. 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.
Additionally, you can choose to pay more toward your debt to speed up the repayment process.