Debt Avalanche

Full definition

The debt avalanche is the mathematically optimal debt payoff strategy. By targeting the highest APR debt first, you reduce the rate at which interest accrues across your entire debt portfolio as quickly as possible, saving the most money. How it works: List all debts by interest rate, highest to lowest. Make minimum payments on all accounts every month. Take any extra money available for debt repayment and apply it entirely to the highest-rate balance. Once that debt is paid off, add its former minimum payment (plus the extra) to the next-highest-rate balance. Continue until all debts are paid. Example: You have a $5,000 personal loan at 20% APR and a $3,000 credit card at 28% APR. Avalanche tells you to target the credit card first (higher rate), even though it has a smaller balance. Once the card is paid off, roll that full payment into the personal loan. Avalanche vs. snowball: The debt snowball targets the smallest balance first for psychological wins. The avalanche targets the highest rate first for mathematical efficiency. Studies consistently show the avalanche saves more money in total interest. However, the snowball can be more motivating for people who struggle with consistency. The best method is the one you will actually stick with. When to use avalanche: If you are disciplined and motivated by numbers rather than quick wins, the avalanche maximizes savings. It is especially powerful when the rate differential between debts is large (e.g., a 29% credit card vs. a 10% personal loan). Personal loan refinancing angle: If you can consolidate high-rate debts into a lower-rate personal loan, you automatically implement a form of the avalanche by reducing your blended interest rate across all balances simultaneously.

• Debt Snowball
• Debt Consolidation Loan
• Debt-to-income ratio (DTI)