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Being deep in debt can be overwhelming, and the words “debt avalanche method” can inspire you to think you’re going to try something that would bury you in bills. The avalanche method of reducing debt refers to a way to pay off your debt using a well thought-out method of prioritizing your payments. This debt reduction method focuses on high interest rate loans or credit card balances. High interest rates can compound debt amounts to the point you won’t be able to pay the amount you owe: an amount that could far exceed the original amount you borrowed.
Is the Avalanche Method Cost-Effective?
Proponents of the debt avalanche say it is the most cost-effective way to pay off your debt, because it reduces interest rates and speeds up your repayment schedule. The avalanche method gives you a way to reduce the amount of interest you’re paying on credit cards or other loans, which will reduce the amount of money you’ll have to pay back over the course of your repayment periods.
Avalanche vs. Snowball
The avalanche method of repaying debt involves targeting the highest interest rate bills for the quickest repayment. The debt snowball method is focused on giving you a reward for repaying debts and clearing them from your monthly bills. In the snowball method, you target the bill with the lowest balance for the quickest repayment. Because this can be accomplished more quickly, debt experts say it can provide motivation to keep paying off your bills. The avalanche method doesn’t provide as many quick “wins” as paying off smaller debts first.
First Steps in the Debt Avalanche Method
First, make a list of all of your monthly bills. Put the credit card, student loan, car loan, and any other interest-bearing loan payments in order of their monthly minimum payment. Beside the payment amounts, write the total amount you owe, and beside that, the interest amount for each debt. If you’re not sure what the amount is, look at your loan statements. The annual percentage rate or APR will be listed on the statements. Credit cards, for example, will always have an amount listed beside the regular charge, cash advance, and balance transfer lines on your statement. After you have completed your list, identify the highest-interest account you are paying.
Choosing Which Debts to Work on First
The debt avalanche method instructs you to pay off the highest interest rate debts you have first, then move on to lower interest rate debts. You will first need to determine how much your total monthly minimum payments are. After that, you will need to budget and determine how much money you have to be able to pay in addition to the minimum. Even if you have as little as $10 a month left over to make for the payment, you should add that to the minimum payment you are making on your highest interest-rate debt, regardless of the total amount owed.
A financial calculator shows that you will pay less money over a loan repayment period of four to five years by using the avalanche method. Social science research found that the odds of repaying all your debts rises if you focus on paying the smallest debts first, regardless of interest rates.