Definition
The debt avalanche method is a debt reduction strategy that prioritizes paying off debts with the highest interest rates first, while making minimum payments on all other debts. Once the highest-interest debt is paid off, you allocate the money you were paying on that debt to the next highest-interest debt, creating an 'avalanche' effect as more money is applied to subsequent debts. This method typically saves the most money on interest charges over the long term compared to other strategies like the debt snowball, though it may take longer to see the first debt fully paid off if it has a large balance.
Frequently Asked Questions
How does the debt avalanche method work?
1. List all your debts from highest interest rate to lowest. 2. Make minimum payments on all debts except the one with the highest interest rate. 3. Pay as much extra as possible on the highest-interest debt until it's paid off. 4. Roll the entire amount you were paying on the first debt into payments for the next highest-interest debt. 5. Repeat until all debts are paid.
Is the debt avalanche or debt snowball method better?
Mathematically, the debt avalanche method saves more money on interest. However, the debt snowball method (paying smallest balances first) can provide quicker psychological wins, which can be motivating. The best method depends on individual preference and discipline.
What types of debt work well with the debt avalanche method?
It's particularly effective for high-interest unsecured debts like credit cards, personal loans, and private student loans. It can be applied to any collection of debts where you can make extra payments.
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