Debt Avalanche Example If you have an extra $100 a month to put toward debt repayment, you will combine the minimum monthly payment of $120 with the $100 in extra money for a total monthly payment of $220. You'd make that $220 payment each month until the credit card balance goes to zero.
Let's say you have an extra $300 a month. You'll make the monthly minimum payments on each card, and then pay another $300 on Card A. So, you'll be spending $400 a month on Card A until it's paid off. Once that's settled, you move on to Card B.
In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first. Similar to the "snowball method," when the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done.
For the right person, the debt avalanche method could be a win/win. This strategy focuses on paying down your debt with the highest interest rate first. In the long run, you'll not only pay off what you owe but you'll save money in interest, too.
If you're motivated by a quick win, then the snowball method is a better choice. But if you crunch the numbers, the avalanche method would save you $153 in interest, and you could pay everything off in 40 months (according to Magnify Money's snowball vs. avalanche calculator), one month faster than the snowball method.
In order to pay off $6,000 in credit card debt within 36 months, you need to pay $217 per month, assuming an APR of 18%. While you would incur $1,823 in interest charges during that time, you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
When prioritizing paying off your debt, start with the balance that has the higher interest rate (likely your credit cards) and go from there. No matter what type of debt you'll be dealing with, though, the most important factor is that you pay your bills on time.
Avalanche method: pay highest APR card first
Paying off your credit card with the highest APR first, and then moving on to the one with the next highest APR, allows you to reduce the amount of interest you will pay throughout the life of your credit cards.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
Fair Debt Collection Practices Act.
Filing for personal bankruptcy usually won't erase child support, alimony, fines, taxes, and most student loan obligations, unless you can prove undue hardship.
The debt avalanche method means paying off debt with the highest interest rate first. Because you are prioritizing your most expensive loans, this method is the most cost-effective way to pay down debt. In the example above, you would start with the credit card because 18% is the highest interest rate.
There's a good reason to pay off your highest interest debt first — it's the debt costing you the most. Credit cards with higher-than-average APRs can be especially hard to pay off.
A good rule of thumb is to try to pay off any card balance in 36 months, but you might want to see what it will take to pay off the balance in shorter or longer increments of time. Your actual rate, payment, and costs could be higher. Get an official Estimate before choosing a loan.
You can calculate your total interest by using this formula: Principal loan amount x interest rate x loan term = interest.
Completing a mortgage payoff early could save you a bundle of money, not to mention years of not having a big payment hanging over your head each month, according to Dave Ramsey, financial guru, author and host of “The Dave Ramsey Show.”
They stay away from debt.
One of the biggest myths out there is that average millionaires see debt as a tool. Not true. If they want something they can't afford, they save and pay cash for it later. Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary.
In general, it's best to pay off credit card debt first, then loan debt, since credit cards often have the highest interest rates. When you prioritize paying off credit card debt, you'll not only save money on interest, but you'll potentially improve your credit too.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
The debt snowball method is a debt-reduction strategy where you pay off debt in order of smallest balance to largest balance, gaining momentum as you knock out each balance. When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.
Keep paying at least the minimum amount owed on all of them, but focus any extra money you can spare on the debt with the highest interest rate. After you've paid off that balance, tackle the one with the next highest interest rate, then the next, until you've taken care of all of the debts on your plate.