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The “Avalanche” method is a financial strategy that prioritizes paying off debts with the highest interest rates, aiming to reduce the total cost a person pays in the long run, the BCR reported. This approach allows for a more efficient reduction of the amount accumulated in interest and is especially useful for large debts with high interest rates, such as credit cards or consumer loans.
According to the BCR, the Avalanche method is based on a simple but effective logic: order all debts from highest to lowest interest rate. While making the minimum payment on each debt, all additional available money is allocated to the debt with the highest interest rate. Once that debt is fully paid off, the amount previously used to pay it off is redirected to the next highest-interest debt, and so on.
This system aims to address the main problem of debt first: high interest rates, which over time can double or even triple the original amount owed. By reducing interest rates from the outlook, the borrower achieves significant savings and shortens the overall time needed to become financially free.
The BCR highlighted that this method is ideal for people managing multiple debts simultaneously, especially those with high interest rates, such as credit cards, personal loans, or financed purchases. Although it may take longer to see visible results (such as eliminating a debt entirely), the main benefit is paying less interest in the long run.
To correctly apply the Avalanche method, the institution recommends knowing the exact interest rates of each debt, making minimum payments on time, and allocating any extra income (bonuses, overtime, or savings) to paying off the most pressing debt. Consistency is key for the method to work effectively.
Finally, the Banco Central emphasized that the Avalanche method not only helps improve personal financial health but also fosters a culture of responsible credit management, allowing people to regain control of their finances, reduce economic stress, and move toward greater financial stability.
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