Definition
The debt avalanche method is a debt payoff strategy where you make minimum payments on all debts, then put every extra dollar toward the debt with the highest interest rate. Once the highest-rate debt is paid off, you roll its payment into the next-highest-rate debt. This method minimizes total interest paid, making it mathematically optimal.
Example
You have three debts: a credit card at 22% APR ($3,000), a personal loan at 12% APR ($5,000), and a car loan at 6% APR ($8,000). You have $200/month extra. With the avalanche method, you attack the 22% credit card first. Once it's paid off, you roll that payment into the 12% loan, then the car loan. Compared to making only minimum payments, the avalanche saves hundreds in interest and cuts your payoff timeline significantly.
How It's Calculated
Apply the minimum payment to every debt each month. Direct all extra funds to the highest-interest-rate debt until it's paid off, then repeat for the next highest. The total interest saved equals the difference between your avalanche payoff costs and paying only minimums.
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