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The debt avalanche method is one of the ways to clear your debt. How does it work, and is it right for you?
In my previous money post, I talked about the debt snowball method. This is one of the most popular ways to pay off debt, but there is an option that will work out a little cheaper for you. It’s known as the debt avalanche method.
This is where you work with the debt that has the highest interest payments first. The idea is that you get rid of that debt first so that you pay less in the long run. It can mean you don’t see the debt cleared off* as quickly as you’d like, though.
What is the debt avalanche method?
You still lay out all your debts*, but you order them slightly differently to the snowball method. Instead of ordering them in lowest debt to highest debt, you order them in highest interest rate to lowest interest rate. Don’t just look at the percentage on the cards and loans. You’ll also want to look at the balance and the minimum payment you’ll need to make.
For example, you could have a $1,000 debt at 10% interest, but a $2,000 debt at 9% interest is going to end up costing you more in the long run.
Some people do just work with the highest interest rate in terms of percentage. It all depends on how your mind works and what you see when you look at all the figures.
Does the avalanche method for debt removal work?
Does this work to get rid of debt? Well, yes, but it can seem to take longer. You’re likely to end up clearing one of your bigger balances first, such as your student loan or a car loan. This is because the amount of interest charged quickly adds up, and you want to get rid of those higher payments.
Once you get rid of that higher interest debt, you then move onto the next. If you have two with the same interest rate percentage, you’re going to work on the higher balance first as it has more in interest adding onto it.
This is why the debt avalanche method doesn’t work for everyone. Some people need to see that their paying off is working. They need to see some loans and cards gone quickly. Only seeing their student loans go down a little and having credit cards still to pay off each month can be a little disheartening.
It can also be difficult to get extra loans in the near future. Your credit utilization may still be on the higher side, which affects your credit score. So, if you’re thinking of applying for a car loan in the next 12 months, you may want to switch to the snowball method for a while to get some of those credit cards paid off.
You can always end up switching between the two methods if you want. You may find that clearing off a couple of smaller credit cards and then switching to the avalanche method is the best option for you. The biggest benefit of the avalanche method is the amount of money you save in the long term, as long as you stick to the plan!
MORE: 3 tips to boost your credit score in 2023
Which method of debt reduction do you prefer the most? Share your thoughts in the comments below.
Getting in touch with a financial advisor could be the best way to pay down your debt.
