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.
The snowball method tackles your lowest balances first, offering small, more immediate wins. The avalanche method prioritizes higher-interest debts, reducing your long-term costs most. Read more stories from Personal Finance Insider.
Between the debt snowball and the debt avalanche methods, the debt avalanche method is the quicker of the two. That's because this method focuses on paying down the debt with the highest interest rate first, which in turn means that your debt will accumulate less interest fees as you pay off that card.
key takeaways. The debt avalanche is a systematic way of erasing debt relatively fast and cheaply for those who can stick with it. With a debt avalanche, you make the minimum payment on each source of debt, then use any remaining available funds to pay extra on toward the debts with the highest interest rates.
When you have multiple credit cards, it's more effective to focus on paying off one credit card at a time rather than spreading your payments over all your credit cards. You'll make more progress when you pay a lump sum to one credit card each month.
Option 1: Pay off the highest-interest debt first
Best for: Minimizing the amount of interest you pay. There's a good reason to pay off your highest interest debt first — it's the debt that's charging you the most interest.
In terms of saving money, a debt avalanche is preferable. Since it has you pay off debts based on their interest rates—targeting the most expensive ones first—it means you end up paying less in interest.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
Failing to pay your student loan within 90 days classifies the debt as delinquent, which means your credit rating will take a hit. After 270 days, the student loan is in default and may then be transferred to a collection agency to recover.
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.
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.
Always pay more than the minimum payment on credit card bills if possible. Avoid applying for more than one or two credit cards at a time. Consider transferring balances to a lower rate card, making sure the low rate applies to balance transfers.
How much debt is a lot? The Consumer Financial Protection Bureau recommends you keep your debt-to-income ratio below 43%. Statistically speaking, people with debts exceeding 43 percent often have trouble making their monthly payments.
Since your credit card likely charges higher interest rates than your car loan, it's a good idea to pay off your credit card debt first. Credit cards have variable interest rates.
Rather than focusing on interest rates, you pay off your smallest debt first while making minimum payments on your other debt. Once you pay off the smallest debt, use that cash to make larger payments on the next smallest debt. Continue until all your debt is paid off.
Despite what you may have heard through the grapevine, it's always better to pay off your entire balance — or credit debt — immediately. Not only will this save you time and money, but it'll reflect well on your credit score.
It's Best to Pay Your Credit Card Balance in Full Each Month
Leaving a balance will not help your credit scores—it will just cost you money in the form of interest. Carrying a high balance on your credit cards has a negative impact on scores because it increases your credit utilization ratio.
National Debt Relief is a legitimate debt settlement company. It has a team of debt arbitrators who are certified through the International Association of Professional Debt Arbitrators.