What Is a Debt Avalanche?

There are lots of ways to get into debt, but only two basic ways to pay it off. They are popularly known as the debt avalanche and the debt snowball.

Mathematically speaking, a debt avalanche (also known as “debt stacking”) will allow you to repay debts in the shortest time and will save you the most money on interest. A debt avalanche targets debts with the highest interest rates first.

A debt snowball plan, in contrast, prioritizes your smallest debt first no matter the interest rate. You direct your payments toward larger debts as the smaller ones are eliminated.

If you need short-term victories to inspire you, you’re a debt snowball candidate. If you tend to be analytical and patient, a debt avalanche may appeal to you.

Proponents of the debt avalanche include NerdWallet columnist Liz Weston. “You’ll get out of debt more quickly by going after toxic debt first,” she says. “On the other hand, if you truly don’t think you’ll succeed without making small victories, a debt snowball is way better than doing nothing at all.”

Here’s an example of how a debt avalanche offers potential savings. This borrower has $1,400 to spend each month on debts, and her monthly minimum payments are $1,162. That leaves her about $240 each month to help get out of debt. Here’s how the two strategies compare:

Debt Avalanche

Priority	Balance	APR	Minimum Payment	Paid off in
Interest paid			$7,840
Credit card 1	$9,000	19.5%	$270	22 months
Credit card 2	$8,400	13.0%	$252	28 months
Auto loan	$21,200	9.8%	$520	36 months
Student loan	$4,900	4.0%	$120	37 months
Total owed	$43,500		$1,162

Debt Snowball

Priority	Balance	APR	Minimum Payment	Paid off in
Interest paid			$9,079
Student loan	$4,900	4.0%	$120	15 months
Credit card 1	$8,400	13.0%	$252	25 months
Credit card 2	$9,000	19.5%	$270	31 months
Auto loan	$21,200	9.8%	$520	38 months

Under a debt avalanche, the borrower gets out of debt a month sooner and saves more than $1,000 in interest. The first paid-off debt comes after 22 months versus 15 months under a snowball plan.

Before you start

Calculate your monthly obligations by gathering all your statements for a month. If you’ve never figured out exactly how much you owe, this process can be both eye-opening and frightening.

It may, in fact, raise questions about whether you can ever pay off your debt. If you can’t pay off your unsecured debts, such as credit cards and personal loans, in five years or less you may need to investigate options for debt relief.

Most people can address their debt without such drastic measures by creating a budget and sticking to it, which frees up the cash needed to implement an avalanche debt-payoff strategy. Once you’ve got a handle on what you owe and where you spend, it’s time to start on the avalanche.

Using the debt avalanche strategy

Write down the interest rate you’re paying on each debt. (If you have a temporary low rate on some cards, use the rate you’re actually paying, not what it will go up to after the promotional period.) Then, put the debts in order from highest to lowest interest rate.

Record the minimum payment on each debt. Do that even if you would never dream of paying just the minimum, you’ve heard you should always pay more than the minimum or you’ve been paying more than the minimum (and still getting nowhere).

Add up all the minimums you must pay and then figure out how much additional you can pay to begin to get rid of your debt.

Let’s say you have a hospital bill for $300, and the hospital is allowing you to pay on it interest-free. You may also have a credit card bill for $2,500 at 22.9% interest and another for $5,000 at 15.9%. That $2,500 credit card balance becomes your top priority because it carries the highest interest rate. If you can put an extra $200 over your total minimums to pay off debt, it will go to that one until it is paid off. Then you add that debt’s minimum to the $200 extra, and put the total toward the bill with the second-highest interest rate.

Continue knocking off debts and rolling their minimums into the payment amount until the debts are repaid. If a promotional interest rate ends, you may have to reorder your debts to keep your focus on the one with the highest rate.

Is the avalanche method for you?

Although you may understand intellectually that you are taking the most logical route to becoming debt-free, you may have to wait a long time for the little triumphs of knocking debts out, especially if your highest-interest debt is the largest.

You can build a spreadsheet to track your progress, but a debt payoff calculator can do all of those steps for you automatically and even suggest where your extra cash might do the most good. Most of all, it gives you the emotional payoff of watching your debt shrink.

That’s important. If you grow weary of the sacrifices you are making to pay off debt, you may decide it’s not worth the effort and quit. If you do that, all the money that you were going to save — on paper — won’t matter.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.