The Debt Avalanche Method is a strategy for paying down debt. It involves first making minimum payments on all debts. Then using any remaining funds to pay off the debt with the highest interest rate first.
Once the debt with the highest interest rate is paid off in full, you move on to the debt with the next highest interest rate, and so on until all debts have been repaid in full.
Using the Debt Avalanche Method can save you money on interest payments and can help you become debt-free more efficiently while minimising the cost of interest.
How to Implement the Debt Avalanche Method
- List all your debts from the highest interest rate to the lowest interest rate. You can find the interest rate listed within your debt statements.
- Make minimum payments on all your debts. You must keep up minimum repayments on all other debts to avoid penalties, fees, and the negative impact it would have on your credit score for missing a payment.
- Allocate all extra funds to the debt with the highest interest rate until it is fully paid off.
- Repeat the process with the next highest interest rate debt, and continue until all debts are paid off.
By focusing on the debts with the highest interest rates first, you minimise the amount of interest that you pay over time. This can save you money, and allow you to pay off your debts faster.
What to do When You Have Multiple Debts with Similar Interest Rates
If you have multiple debts with similar interest rates, you might consider paying off the one with the smallest balance first.
This can give you a psychological win and help you build momentum, which is also the principle behind the Debt Snowball Method.
Alternatively, you could focus on the debt that bothers you the most or has the most significant impact on your credit score.
Remember, the key is to stay consistent with your payments and to keep evaluating your strategy as your financial situation evolves.
What If My Highest Interest Debt is Also the Largest One?
If your highest interest debt is also the largest, it might feel daunting to tackle it first.
From a financial standpoint, paying off this debt first will save you the most money in interest over time.
By sticking with a repayment method, you will become debt free, provided that you do not create any new debts during the repayment process.
Tips to Help Manage This Situation:
- Stay disciplined with your budget to allocate as much as possible towards the debt.
- Consider ways to increase your income, such as taking on extra work or selling items that you no longer need.
- Look into balance transfer offers or debt consolidation loans if they can offer you a lower interest rate.
- Keep track of your progress and celebrate small milestones to stay motivated.
What if My Income is Not Enough to Cover All the Debt Payments?
If your income isn’t enough to cover all your debt payments, here are some steps you can take:
- Review your budget to identify any non-essential expenses that you can reduce or eliminate.
- Contact your creditors to explain your situation and ask if they can offer any relief, such as reduced payments or a temporary pause on interest.
- Get free debt advice. You can get free, confidential and independent advice on dealing with debt problems. The UK government maintains a list of where to get free help here.
- Explore additional income sources, like part-time work or freelance opportunities.
- Prioritise essential expenses, such as housing, utilities, and food, and then allocate the remaining funds to your debts.
It is important to act early and communicate with your creditors to find a solution that works for both parties.
Whichever debt repayment method you use, make sure that you keep up with the minimum payments on all your debts otherwise you may be surprised with fines and penalties that will delay your ability to pay off your debts and live a debt-free life.