Debt avalanche budgeting explained

Are credit card balances and other debts creeping up on you? Credit card debt has reached record highs post-pandemic, with rising interest rates and stubbornly high inflation making it difficult to pay off credit cards and other debt. Making minimum payments may keep you in debt for the foreseeable future. Enter: the debt avalanche paydown method.

By combining a few extra dollars each month with a strategy for tackling your highest-interest debts first, you may be able to pay down your debt more quickly. Here’s how it works.

What is the debt avalanche method​ & how does it work​? 

The debt avalanche method is a debt repayment strategy that helps you pay off your credit card balances and other debts starting with your highest-interest debt first.

You begin by pledging extra dollars toward paying down your debts every month. While you continue making minimum payments on all your accounts, use those extra dollars to add to the minimum payment on your highest-interest balance. The more extra cash you can commit to paying over and above your minimum payment, the faster that balance will be paid off.

When your first account is paid off, you’ll roll all the money you budgeted to pay off that first debt into your next highest-interest account. Continue paying that balance down until it’s gone, too. Keep repeating this method of accelerated debt paydown until all your debts are completely paid off.

If you have high-interest debt, including credit card balances at 25% or higher, tackling your highest-interest accounts first may save you money and help you get out of debt faster. By rolling or “avalanching” money each month toward debt paydown, you can accelerate debt repayment faster than if you continued with making only minimum payments.

How does it work?

The idea behind the debt avalanche is simple and executing it can be easy as long as you’re able to budget some extra dollars for debt paydown in the beginning. Make the debt avalanche work for you by following these five steps.

1. List your debts by highest to lowest interest rate.

Make a list of the debts you want to pay off, sorting them by highest to lowest interest rate:

2. Pay extra toward your highest-interest debt.

Since account B has the highest interest rate, you’ll start paying down that account balance first. Let’s say you have an extra $120 a month to put toward paying down debt in addition to the money you’ve already budgeted to cover your minimum payments. Continue making minimum payments on accounts A and C. Add $120 to the $325 minimum payment on account B and pay $445 every month until account B is paid off.

3. Add your payment into the next highest-interest balance.

When you’re done paying off account B, add the $445 you were paying monthly on that account to the minimum payment amount on account C. Pay $530 monthly on account C until it’s paid off.

4. Repeat until all your debts are eliminated.

Now that accounts B and C are paid off, you now have $685 monthly ($530 plus $155) to pay down the balance on account A. Keep paying $685 monthly until your debt on account A is gone.

How does the debt avalanche method pay down debt faster?

By paying off the highest-interest debts first, you pay down your principal balance faster, reduce the amount of interest you pay over the life of the loan, and save yourself money. Here’s how the debt avalanche method compares to making minimum payments on your accounts.

If you make the minimum payments only.

If you made your current minimum payments only on your three accounts, this is an estimate of how long it would take to pay off your debts and what it could cost you in interest:

^†The information provided is for educational purposes only. Your lender may charge other fees which have not been factored in these calculations.

In this scenario, you would finish paying off all three accounts, a total debt of $19,000, in just over five years. Assuming all payments were made timely and in full, your total interest paid on all three accounts would be $12,454.

If you use the debt avalanche method:

If you budgeted an extra $120 a month and started with the highest-interest account first, the debt avalanche method would pay off your debt almost two years faster with a 33% savings on interest costs. Here’s how the debt avalanche method could be used to pay off $19,000 in credit card debt in three years and four months:

When you use the debt avalanche method to pay down high-interest debt, your extra money chips away at your highest-interest principal balance first. As your principal balance gets smaller, you pay less in interest, which allows more of your payment to go toward paying down principal, and so on.

The difference is real: Debt avalanche pays off your debts in 40 months versus the 61 months you would need using your current minimum payments only. You stand to save $4,074 ($12,454 minus $8,380) in total interest using the debt avalanche method.

Even paying as little as $20 a month toward your highest-interest debt would chop eight months off your payoff date and more than $1,000 from your total interest.

Who should use the debt avalanche method?

The debt avalanche method is most effective for people who have high-interest debt they want to pay it down as fast as possible. By reducing your highest-interest debt first, you maximize the amount you save in interest costs. This can help you get out of debt months, or years, faster than you would making minimum payments alone.

Debt avalanche pros and cons

The debt avalanche method is effective if you can follow it for as long as it takes to pay off your debts. The benefits are saving money, paying off debt faster, and—maybe most important of all—giving yourself a strategy for tackling debt. Without a clear plan for reducing (and ultimately eliminating) debt, it can be hard to make headway and maintain the focus you need to reduce your debt all the way down to zero.

This method works best when it’s part of an overall financial plan that includes careful budgeting and saving.

While you’re paying down debt, try not to use your credit cards to cover your daily expenses if possible. Otherwise, your balances will increase even as you’re working to pay them down. But if you can’t avoid it, use the card with the lowest APR.

Savings can help you avoid charging up unexpected expenses on your cards, so you can continue to make progress on paying down balances. Budgeting can help ensure you save for emergencies and still have enough money every month to make your debt payments according to plan.

Other debt repayment methods to consider

There are other methods for paying down debt. Here are a few you might want to consider:

Debt snowball method

The debt snowball method is similar to the debt avalanche method, but instead of paying your highest-interest balance first, you start with your smallest balance. Starting small gives you a quick win: Your first balance may be eliminated fast, which can be motivating when you’re facing what feels like a mountain of debt.

Applying the debt snowball method to the accounts in our earlier example allows you to pay off $19,000 in debt in 41 months at a total interest cost of $9,079. That’s about a month longer and $699 more in interest than it would take using the debt avalanche method.

On the other hand, debt snowball lets you pay off your first card completely in 18 months versus 32 months with debt avalanche. Of course, your outcome will vary depending on the number and size of your accounts, and the interest rates you pay. You may want to work out debt repayment plans using both the avalanche and snowball methods, then pick the one that’s most appealing to you.

Debt snowflake

Every time you walk instead of taking an Uber, skip your afternoon latte, or redeem a cash-back reward, you save a few dollars you could use to pay down debt. With the debt snowflake method, you capture these small savings and apply them toward your balances. This method may work best in tandem with the debt avalanche or snowball methods, where a small amount of additional paydown adds to the overall effect, without having you rely on solely small incidental savings to pay off your debt.

Debt consolidation

With debt consolidation, you roll multiple credit card and loan balances into a single loan, often a fixed-rate personal loan that you pay off in monthly installments. If you have good credit, you may be able to secure a debt consolidation loan at a far lower interest rate than you’re paying on credit cards. A fixed-rate installment loan also gives you a built-in plan for paying off your debt: Assuming you’ve made all your payments on time, when your loan term is finished, your debt is, too.

Financing $19,000 in credit card debt using a 4-year debt consolidation loan at 12% would cost you $500 monthly and $5,016 in total interest. Compared with $685 monthly and $8,380 in interest using the debt avalanche method, a debt consolidation loan may be an option worth considering.

However, be aware that your interest rates will vary, and your ability to qualify will depend on your credit score and income. Debt consolidation loans usually come with origination fees that can add to your principal balance, so review your terms carefully to understand the pros and cons before you sign on a new loan.

Unlike debt consolidation, the debt avalanche method doesn’t require you to take out (or qualify for) additional loans: It’s entirely DIY. You can work out a debt avalanche strategy yourself and start implementing it right away. You can also stop at any time with relatively little downside, although sticking with it is what gets you to zero debt.

3 common debt avalanche mistakes to avoid

If you’re thinking about using the debt avalanche method, here are a few common mistakes to avoid:

1. Not enough money to pay your bills: Make sure there’s room in your monthly budget to cover your regular monthly expenses plus your avalanche payments with a little left over for savings. If you’re running short month after month, you may be forced to cut back on your extra debt payments to make ends meet or worse, go further into debt.

2. Not enough savings to cover unexpected expenses: Surprises happen. If you don’t have the savings to pay for a new transmission or your middle schooler’s week at space camp, you may resort to using your credit cards and adding to your debt.

3. Not enough motivation to make it to the finish line: Paying off your debts may take months or years. During that time, you’ll need to stick to your budget, avoid running up additional debt, and make your payments as planned. Look for an easy way to track your progress to help keep your focus and motivation up.

What's better for getting out of debt: Debt avalanche or debt snowball?

Debt avalanche may be better than debt snowball if you have high-interest debt that’s making it difficult to pay your balances down. As a simple example, let’s say you have a credit card balance of $5,000 at 23.9% interest and a car loan of $4,000 at 4% interest. Budgeting extra dollars to pay off your credit card balance first will save you money in interest charges, pay your combined debt off faster, and get you to zero debt sooner.

The differences aren’t always so clear-cut, however. The extra motivation you get from paying off an account in full early on might really help you stay with your program. If the interest rates on your accounts are similar, it may not make much of a difference whether you choose debt avalanche or debt snowball.

Ultimately, it may be most important to choose something. Starting with either of these methods—or an alternative like debt consolidation—puts you on the right path. You may decide to alter your course or encounter a few hiccups along the way. Still, making a plan and executing it is the surest way to start making progress.

The bottom line

Getting into debt can be accidental; getting out of debt rarely is. Using a payoff strategy like the debt avalanche method can help you wrangle out-of-control credit card debt, pay it down faster, and free yourself from a negative cycle of revolving debt. Better still, you don’t need a degree in finance to get started. Get your debts in order, get your budgeting tools in gear, and start taking on your debt now.