How does the debt avalanche method work?
The biggest advantages of the debt avalanche method are the savings and the speed it offers. By tackling your high-interest debt first, you will be able to pay off the debt the fastest while saving as much on interest as possible.
In addition, the avalanche of debt offers you a simple, easily comprehensible payment structure. If you’ve struggled to come up with your own plan, the debt avalanche is a great solution.
There are also some potential downsides to the debt avalanche. Paying off an account in full can take a while, and that can be daunting. If you’re juggling multiple accounts and struggling to manage payments on all of them, it may be better to start debt consolidation through the debt avalanche.
While the debt avalanche works well when you have an disposable income, it’s not an option when you are tight on cash. You must have enough to make all of your minimum payments with a balance.
Alternatives to the avalanche of debt
The most important alternative to the avalanche of debt is the debt snowball method. It’s a similar strategy, except that the debts are paid off with the smallest balances first. With the debt snowball, you make minimal payments on all of your debts and then pocket extra money on the smallest balance debts.
The debt snowball, while not saving you that much on interest, is popular because it helps people stay motivated. By focusing on debts with the smallest balances, you pay off accounts sooner. Every time you cash out an account, it’s a small win that encourages you to keep going.
Depending on your financial situation, you may find that neither the debt avalanche nor the debt snowball suit you. For example, if minimum payments are the maximum you can do, neither of these strategies will work. Here are a couple of options that:
- Debt Consolidation: When you apply for a personal loan, you can use it to consolidate your debts – you settle all of your debts on the loan and then just make your loan payments. Not only does this reduce the number of payments, but the best debt consolidation loans can give you a lower interest rate and monthly payment amount.
- Compensation transfer: A balance transfer is when you transfer a credit card balance from one card to another. Top balance transfer credit cards offer an introductory APR of 0% so you have time to pay off debts without interest.
- Credit advice: There are nonprofit credit counseling agencies that will work with you to help you pay off your debt. They can go through your budget with you, work out a payment plan, and even negotiate with creditors to pay you a monthly payment amount that you can afford.
Keep in mind that some of your debt settlement options will depend on your creditworthiness. Credit cards with prepaid transfer usually require a good credit rating (a FICO® score of 670 or higher). Lenders can be more flexible with debt consolidation loans, but they use your creditworthiness as a factor in determining the interest rate on your loan.
Is the Debt Avalanche Method Right For You?
The debt avalanche method is a great choice if you are sure you can stick with it. By targeting accounts with the highest interest rates first, you will save more money. This makes the debt avalanche one of the most effective ways to get rid of debt.
If you have a good credit score, consider a credit card carryover or a debt consolidation loan first. These allow you to lower the interest rate on your debt. But the debt avalanche is better if you are in the process of building up a loan or just don’t want to apply for another credit card or loan.