Debt avalanche

The debt avalanche is an order, not an amount. Every debt gets its minimum payment so nothing goes late, and every extra dollar goes to the debt with the highest interest rate until it is gone; then its whole payment rolls onto the next highest rate. Of every order the same monthly total can be paid in, the avalanche costs the least interest, and it is never slower, because each extra dollar is sent where it stops the most interest. What it gives up is the early win: the most expensive debt is often not the smallest, so the first account to close can take months.

In a sentence

• "With the debt avalanche, the $3,400 credit card at 26.99% goes first, and the $600 store card waits because its rate is lower."
• "The debt avalanche saved $15 of interest against the snowball on the same three debts, and both were done in 21 months."
• "Choose the debt avalanche when the arithmetic is what keeps you paying, and the snowball when a closed account is."

How it works

1. List every debt by interest rate, highest first, with its balance and minimum payment; when two rates are equal, the smaller balance goes first.
2. Pay the minimum on all of them, every month. Nothing goes late.
3. Decide the extra, the fixed amount above the minimums the budget can send to debt each month, and send all of it to the highest-rate debt.
4. When that debt is paid off, roll its whole payment onto the next highest rate: its old minimum plus the extra. The total leaving the budget stays the same.
5. Repeat until the last debt is gone. The lowest-rate debt, usually a car or student loan, is paid last.

Payment on the target debt = its minimum + the extra + the minimums of every debt already paid off

The rate decides the order, and the balance decides how long the first payoff takes.

An example

Three debts, $400 a month extra above the minimums, and $730 a month to debt in total; the rates are the example's assumptions.

Charging each debt a twelfth of its APR each month, the two orders come out like this.

The avalanche saves $15, because the two card rates are only four points apart and the store card is small, so the interest it charges while it waits is small too. The car loan, at 6.9% on $9,500, is last under both orders. With the minimums held fixed and nothing extra, these three debts would take 104 months and about $7,050 of interest, the figure both methods are really against.

Why it matters

The avalanche is the arithmetic method. Every dollar sent to the highest-rate debt stops more interest than the same dollar sent anywhere else, so the total interest over the plan is the lowest any order can produce. The saving is set by the gap between the rates and the size of the balance that waits: small on cards within a few points of each other, large when a low-rate loan would otherwise be paid ahead of a high-rate card. The mistake it prevents is paying down a 7% car loan while a 27% card keeps charging; the mistake it shares with every method is spreading the extra across all the debts, which clears none of them early.

Debt avalanche versus debt snowball

Both methods pay every minimum and send everything extra to one debt at a time; the avalanche orders the debts by interest rate, highest first, and the debt snowball by balance, smallest first. The avalanche always costs less in interest and is never slower; the snowball always clears its first debt sooner, and a closed account is what keeps some people paying. When the rates are close, the avalanche's saving is small and the snowball's early win is nearly free. See Debt snowball versus debt avalanche, with a worked example for a rule that combines the two.

Common questions

Is the debt avalanche better than the debt snowball? In interest, always, by an amount that depends on how far apart the rates are. In time to the first payoff, usually not, because the highest-rate debt is rarely the smallest. The better method is the one you will keep up, and both beat paying minimums only by years.

How much does the debt avalanche save? On the three debts above, $15 over 21 months, because the card rates are four points apart. On the learn article's three debts, where the largest card charges 24% and the smallest 15%, $161 over 27 months. The saving is the interest the higher-rate balances would have charged while waiting their turn.

Should the car loan or the mortgage be in the avalanche? The car loan, yes; at its rate it is usually last, and the rolled payment clears it once the cards are gone. A mortgage is usually left at its regular payment: lowest rate, largest balance, longest term.

What about a 0% promotional balance? Treat it as the lowest-rate debt until the promotion ends and the highest-rate debt from that date, and plan the order so it is gone before the rate jumps. If it will not be, it is the target in the months before the change.

Go deeper

• Debt snowball versus debt avalanche, with a worked example runs both orders on the same debts, month by month, and gives a rule for choosing.
• The Debt payoff calculator takes your cards and loans and what you can pay each month, and compares the avalanche and the snowball: when you are debt-free under each, what the interest costs, and the order the debts fall.
• How paying off debt raises your net worth shows what the principal in every payment does to the other number.

Where it shows up in Zypper

Zypper keeps the balances and the payments in view. Credit cards and loans, including auto, student and personal loans, connect alongside checking and show their balances on the liability side of net worth, charted over time, so the total falling by the principal each month is a line rather than a set of statements. Each card payment and each loan payment is identified as a recurring group with its next expected date and amount, and a card payment is linked to its checking side as one transfer so it never reads as spending. The extra payment is a budget category with a fixed amount, and Left to budget, your expected income minus everything budgeted for spending, shows whether the plan still fits after it. See Net worth tracking, Supported account types, and Recurring transactions and bill tracking for the details, or get started with Zypper to watch the total fall.