Debt Avalanche: How to Pay Off Debt and Stay Motivated

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Tired of swimming in debt? If you want to pay off your credit cards, student loans, personal loans or other obligations in a shorter period of time, you may consider the debt avalanche repayment method.

A debt avalanche may be the most effective way of reaching your goal of freedom from debt. Here’s how it works, how to get started and alternative repayment methods to consider.

What is a debt avalanche?

The debt avalanche repayment system means that you pay off your debt with the highest interest rate first. For example, let’s say that you have three credit cards:

  • Credit card No. 1: $432 balance and a 12% interest rate
  • Credit card No. 2: $254 balance and a 15% interest rate
  • Credit card No. 3: $1,796 balance and a 22% interest rate

If you were looking to repay your credit card debt with the debt avalanche method, you would focus extra payments toward credit card No. 3, because it has the highest interest rate.

“Mathematically, the avalanche method of paying off debt makes more sense,” said Dominique Broadway, personal finance expert and founder of Finances Demystified. “You’re going to save money because you're tackling your most expensive debt first. Once that debt is handled, move on to the next most expensive debt and keep knocking them out one-by-one.”

Another repayment method: The debt snowball

However, the debt avalanche method is also going to take you longer to see results, which is why some people use another method of debt repayment -- called the ‘snowball method.’ This snowball method suggests that consumers pay off their smallest balances first.

“There is something very confidence building about paying off a smaller debt, just to give you a sense of satisfaction that you accomplished a goal,” said Kerry Hannon, a Washington, DC-based personal finance expert and author of “Money Confidence: Really Smart Financial Moves for Newly Single Women.” “You want to feel like you're making progress and paying off high-interest accounts can be harder to get your head around.”

Which is better: The debt snowball or avalanche?

So, what’s the best approach to paying off your debt? Both finance experts agree that what debt repayment plan you choose really depends on your own debt situation.

To illustrate how borrowers may choose between these two repayment methods, Broadway offered this scenario on two borrowers, Nicole and Tom:

  • Nicole has a $10,000 car loan, a $5,000 personal loan and four small medical bills of $100, $250, $75 and $30.
  • Tom has two major debts of $20,000 and $10,000.

“Nicole will feel like she’s making quicker progress tackling those smaller debts first,” said Broadway, “but Tom’s debts are bigger so he should use the debt avalanche method and pay the debt with the higher interest rates first.”

Which one you choose will depend on if you want to feel better paying off smaller balances more quickly or you can commit to the longer, but more financially beneficial, debt avalanche method.

Other repayment methods to consider

While the debt avalanche is a popular and easy-to-follow method to paying off your mountains of bills, it’s not your only option. There are other types of loans and services available to help you pay off that nagging debt.

Debt consolidation loans

Feeling overwhelmed paying multiple debts with varying interest rates? Consolidating your debt with a loan may be helpful.

Pros

  • Combine most or all of your debt into one fixed-interest payment. “A fixed monthly payment can help you plan for what you need to pay each month,” said Broadway.
  • Debt consolidation loan interest rates may be lower than your credit card interest rates.
  • You can pay off debt faster, if you can secure a lower rate or choose a shorter repayment term.

Cons

  • Your personal loan may come with an origination fee. These fees range from 1% to 6%.
  • If you start using your available credit again, you’ll be right back to where you started and why you needed the loan in the first place.

Credit counseling services

You’ve probably seen the ads where credit counseling services will get you out of debt by talking to your creditors and negotiating a payment plan with, hopefully, lower interest rates than you are currently paying.

Do your homework before signing on the dotted line, though. “Research the company and make sure it’s legit,” said Broadway. “Then crunch their numbers to make sure that it makes sense for you to combine all this debt into one monthly payment, and find out what their terms are,” said Broadway. “For example, are they having you default on the debt to get a lower rate?”

Pros

  • A credit counseling service can help you to understand debt and create a budget plan that you’ll stick to.
  • The service can help you to create a plan to bring your bills current.

Cons

  • There may be fees for signing up with specific programs so ask first before signing on the dotted line.
  • Your credit may be frozen and, in an emergency, if you need that availability you may not be able to tap into it.

Staying motivated as you repay debt

No matter what method you choose to pay off your debts, it took time to accumulate this much debt, so it’s going to take time before you see results. But to see results you have to stick to the plan. Broadway provides a few tips that will help to keep you to stay motivated while you’re working hard:

  • Make a chart: Use a motivational chart that also tracks the downward spiral of the debt.
  • Have a partner: Knowing someone else is doing this too can keep you both motivated.
  • Reward yourself: This doesn’t mean buying something big and fancy when you just paid off some of your debt. “Treat yourself to something inexpensive, like a massage,” said Broadway.

“Getting financially fit gives you options and, not only is it empowering, but it gives you options of what you can do with the rest of your life,” Hannon said. This includes what jobs you can take and whether you can pursue work that really is a passion for you. “You do not want to be locked into a job that is misery, and you're really unhappy but you need the income.”

To start on your road to being debt free, you should first evaluate your spending and see where you can cut back in order to have the extra cash you need to pay down debt. “It’s like a diet though,” said Hannon. “You can’t ban yourself from spending on everything or you’re not going to be able to stick to it.”

Stick to it and apply any extra cash to your debt. Before you know it, you’ll knock down your mountain of debt into a molehill.

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