Paying off Debt: The Debt Avalanche Method

Paying off Debt: The Debt Avalanche Method

What do you do when you have multiple credit cards, a student loan, and a car repayment? It might seem like you have a very huge problem and the thought of being weighed down by all that debt can be very overburdening.

In order to tackle this huge problem, one must break down a huge problem into smaller problems, and then resolve each of these smaller problems one step at a time.

To start paying off debt, target each individual account separately as a smaller problem. But which one first?

The debt avalanche method is one of the methods of paying off debt talked about by Dave Ramsey and Credit Karma. Using this method, we will pay off debt accounts based off the highest interest rate, first. The debt avalanche method is highly applicable to most people since it’s not very common to have two different debt accounts with the same interest rate.

Debt Avalanche Table

To illustrate, imagine you have the following debts:

Account Balance Interest Rate
Credit Card 1 2000 7%
Credit Card 2 5000 19%
Car Loan 15000 4%
Student Loan 10000 6%

You might be tempted to pay off Credit Card #1 first to get it out of the way. This may be a psychological win but it is not a win financially. Using the debt avalanche method you will want to rearrange the table and pay off your debt in the following order:

Account Balance Interest Rate
Credit Card 2 5000 19%
Credit Card 1 2000 9%
Student Loan 10000 6%
Car Loan 15000 4%

As you can see, the order of interest rates go from highest to lowest, and thus is how the debt avalanche method got its name.

This way you are paying off your credit card #2 first because it has the highest interest rate, credit card #1 second, then your student loans, and finally your car loans. Over the long run, you’ll be giving away less money and maximizing your money efficiency.

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