Debt Avalanche

With the avalanche, debts are ranked from highest to lowest interest rate. All extra money goes towards the most expensive debt. Once it is paid off, that payment moves to the debt with the next highest rate.

Suppose you owe 3,000 on a credit card at 24%, 6,000 on a personal loan at 11% and 10,000 on a car loan at 6%. Under the avalanche, every spare amount goes to the credit card first, even though it is not the smallest balance, because each unit owed there costs the most.

Mathematically, this method saves the most interest and usually clears all debts fastest, because it attacks the most expensive borrowing first.

The drawback is that the first debt may take a long time to clear if it has a large balance, which can feel discouraging. That is why some people prefer the debt snowball, which pays off the smallest balances first for quick wins. Both methods work far better than paying only the minimum on every debt.