The avalanche ranks debts by APR from highest to lowest. Every debt gets its minimum payment, and all extra money goes to the highest-rate debt until it is gone; that payment then rolls to the next highest rate. The CFPB, which calls it the highest-interest-rate method, says the goal is to pay off the most expensive debt as quickly as possible and that this can save money in the long run, though progress may feel slow.
Because interest accrues on every balance each month, retiring the highest-rate balance first reduces the interest charged in later months more than any other order. The debt snowball orders by balance instead, so the two give the same result only when the smallest balance also has the highest rate.
Formula
The plan is simulated month by month:
interest = balance × APR ÷ 12
target = open debt with the highest APR
Example
On $10,500 of debt (a $1,000 store card at 15%, a $6,000 card at 24%, a $3,500 loan at 11%) with $200 a month extra on top of $275 of minimums, the avalanche pays the 24% card first, clears everything in 27 months and pays $2,262.55 of interest. The snowball takes 29 months and pays $2,879.83. See the full comparison and test your own balances in the debt snowball calculator.
Common mistakes
- Ranking by the size of the monthly minimum instead of the APR.
- Not recalculating after a balance transfer or consolidation changes the rates.