How Effective is the Debt Avalanche Strategy
The debt avalanche method of debt relief is an accelerated debt repayment strategy in which credit card and loan balances are prioritized by the highest interest rate. The goal of this strategy is to minimize how much interest you pay starting with the credit card or loan balance that has the highest rate. Essentially, enough money is allocated to making the minimum monthly payments on each of your debts and then paying the remaining repayment funds towards the balance with the highest rate. Though it can take time, but it is an effective way to end the debt.
Debt Avalanche vs. Debt Snowball Strategy
Realistically, the debt avalanche method may be able to help get out from under credit card and loan debt quicker than other debt relief strategies such as the debt snowball method. The difference between the two strategies is that the debt avalanche strategy prioritizes the order in which you pay off your debts by the highest interest rate whereas the debt snowball method prioritizes the debts to be paid off by the total balance owed.
Although the psychology behind the debt snowball strategy is that you’re motivated to keep following the debt relief plan because of having small wins gradually increasing into larger ones with each debt that is paid off. Unfortunately, the debt snowball plan has a one major drawback in that it could be paying more interest over the course of repaying your credit card and loan debt.
How does the Debt Avalanche Strategy work?
There are 4 steps involved in the debt avalanche strategy. However, the first thing you need to do is determine the amount of available income that can go towards maintaining this strategy. That money should come from any funds that have not been designated towards your living expenses (e.g. house payment or rent, transportation, groceries, and so on). Once you have done that proceed with the strategy as follows:
- Make a list of your credit card, loan, and other debts that you owe starting with the ones that have the highest interest rate and continuing in descending order to the lowest.
- Keep paying the minimum monthly amount on all of your balances in order to stay current on all your bills, avoid any additional fees and penalties, and not damage your credit score.
- Pay any additional amount available on the debt with the highest interest rate after paying all of the minimum monthly amounts on your other debts.
- Once the credit card balance or loan with the highest rate has been paid off, move on to the credit card or loan balance with the next highest rate of interest. The amount that you were paying on the first debt can now be used for additional debt payments.
Once you start the debt avalanche repayment method, it’s imperative that you stick with it if you want to be debt-free. If you have doubts or are unable to stick to a regimented budget, it is good to consult with a debt relief expert occasionally so that you can re-evaluate your remaining debt.