Overwhelmed with high-interest debt and looking for smart ways to pay it off? you are not alone. According to Experian's Consumer Credit Review, the average debt balance is $96,371. Despite the decline in credit card balances, the amount owed for personal loans, student loans, and auto loans continues to rise.
However, paying off debt is not a one-size-fits-all approach. What works for someone else may not work for you. If you're struggling to pay off debt, you might try using the debt avalanche method, which helps you manage what's owed to your creditors more effectively by focusing on the more expensive debts first. You can also use the debt snowball, open a credit card for a balance transfer or take out a debt consolidation loan to pay off your debts faster.
What is the method of debt avalanche?
The method for a debt avalanche is to first focus on paying off the debt at the highest interest and work from there. The less you pay in interest, the more money you can pay to pay off the principal.
You still want to pay off the minimum amount of your other debts, but the intent is to reduce the total amount you owe over time.
How to use the debt avalanche method
You can get started on the debt avalanche method with a few simple steps.
1. List out all your outstanding debt
Consider all forms of debt you have. Put each item of debt into the following categories:
- medical debt
- car loans
- Unpaid bills
- credit cards
- personal loans
- student loans
For each debt, list the amount you owe, the minimum monthly payments, the interest rate, and the issuer. It may also be helpful to list when payments are due.
2. Rank the list based on the highest interest debt first
Arrange the list in order from the highest-interest debt to the lowest-interest debt. You will then focus on paying off the debt with the highest interest first. In the meantime, make sure you make minimum payments on all of your debts to protect your credit score and avoid defaults.
For every extra dollar you have, pay off the debt at the highest interest. If you get a bonus or bonus at work, start a side hustle or move to bring your lunch to work instead of buying it, and use that money to pay off your high-interest debt. You will do this until the debt at the highest interest is paid off in full.
3. Continue the process until your debts are gone
Once you pay off your higher interest debt, move on to the next higher interest debt. Set aside more money for each new debt as you no longer have to make minimum payments on paid debts. Update your list every month as your balance decreases and is eventually paid in full.
Advantages of avalanche debt repayment method
The debt breakdown method has some advantages that make it attractive:
- Remove the most expensive debt first: By paying off your higher interest debt, you are removing the debt that is costing you the most money. While the debt snowball method may have faster results in the short term, it may not be the most cost-effective option.
- Helps manage high-interest debt: The debt breakdown method works best for those with high-interest debt, such as credit card debt. Credit card interest rates can be double digits, so you may want to pay them off as quickly as possible.
Disadvantages of a debt avalanche
The debt breakdown method may not be the right one for everyone if the disadvantages outweigh the positives:
- Slower Debt Payments: If your highest interest debt is also one of your largest, it may take a long time before it is paid off. This can leave you feeling like you're not making any progress toward paying off your debt, making it difficult to stick to your repayment plan.
- It's hard to get extra to apply for loans: it will take more time before you can start applying the equivalent of the minimum loan payments you've made to the loans you still have.
- Long-term goals: Many people like to have short-term goals to work on until they feel satisfied with each win. If this sounds like you, you might prefer something like a debt snowball strategy.
Alternatives to the debt avalanche method
When debt looms, some people prefer to have smaller standards that can be achieved when they are paid off. If you are one of those people, the debt breakdown method may not be the best for you. For one thing, it can take months of payments to see results.
The type of debt you have may also influence which method you choose. If you don't have high-interest credit card debt — you probably have student loans and auto loans instead — you may want to consider an alternative strategy.
Snow debt method
The debt avalanche method differs from the debt snowball method, which focuses on paying off your smaller debts first, regardless of the interest rate. Many people like the debt snowball method because it gives them an instant "win", but they may not save as much money on paying down their debts as they do with a debt crash.
Snowball and debt-crash tactics can work if you stick with them - it's a question of which method you find most attractive. The debt snowball allows you to pay off some of your debts in full sooner. However, in most cases, the avalanche method will provide you with more benefits.
Balance Transfer Credit Card
Many balance transfer cards offer 0% APR for a set period of time, anywhere from 12 to 21 months. If you can transfer high-interest credit card debt to a new card, you will be able to end the accrued interest. Be wary of any new debts with your balance transfer card. When the 0 percent APR promotion ends, you'll need to start paying interest if you can't make the payments in full each month.
The full amount may not be approved on your credit cards. This means that you will be responsible for the balance on your new card, as well as any other cards still outstanding.
Debt consolidation
You can consolidate your debts through a few options, including a debt consolidation loan. This happens when you take out a loan to pay off the full balance of your outstanding debts, pay off that debt and then make one down payment on your personal loan each month.
If you have many types of debt, including credit cards and student loans, this may be best for you. But consider taking out a loan only if the interest rate is lower than what you are currently paying. For example, if you get a rate lower than your credit card rate but higher than your student loan rate, use a debt consolidation loan to pay off your credit cards. Keep making your student loan payments as usual.
Another debt consolidation option is a home equity line of credit (HELOC). With this type of debt consolidation, you can borrow against the equity of your home - so it's for people who have a lot of ownership in their home.
debt management plan
If you are struggling to pay off your debt, you may need to reach out to a professional. Nonprofit credit counseling agencies can help you prepare a debt management plan.
Depending on your situation, the agency may consolidate your debts into one manageable monthly plan. Sometimes they can lower your interest rates and negotiate with lenders to reduce what you owe. Keep in mind that not all debts will qualify for a debt management plan. Secured debts, such as debt backed by a home or a car, will not be covered.
Key takeaways
- The debt avalanche method is a debt repayment strategy that begins with paying off your debt with the highest interest first. Once you pay off that debt, you will continue to pay off your next higher interest debt.
- The debt avalanche method may take longer to start paying off debt, but it often saves money on benefits in the long run.
- Debt repayment programs such as the debt avalanche method or the debt snowball methods are objectively no better than others, so choose the program that works best for your debt repayment and your lifestyle.
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Debt repayment programs, such as the debt avalanche method or debt snowball methods, are not objectively better than other options. You may find that an alternative solution, such as a balance transfer credit card, debt consolidation loan, or debt management plan, is the best solution. Make sure you choose the best option for your spending plan and lifestyle.