For a long time, people would tell me how there were two types of debt – good and bad. The good debt was a mortgage or maybe even a car loan (because I would need it to get to and from work). Bad debt was from credit cards.
I learned a secret a few years ago that there is no such thing as good debt. Debt is a ball and chain. An obligation that straps us to more work in order to afford the payments. The more debt you have–good or bad– the higher the probability of experiencing a future personal financial disaster.
If you have debt, your goal should be to eliminate it as soon as you can. Eliminating debt frees up your income to be used towards happier goals instead of past purchases.
Paying off your credit card debt doesn’t mean you’ll never use them again. It just means you’ll never again carry a balance from month to month. And you’ll never pay another cent towards interest.
One thing about credit card debt that bothers me the most is the constant reminder of past purchases. Often these purchases are for things we no longer have or value. That’s why it’s imperative to your wellbeing to get rid of it as soon as possible.
How to eliminate credit card debt using the debt snowball or debt avalanche method
There are steps to follow to become debt-free on your road to financial wellness. An initial step is listing all your credit cards, balances, minimum payments, and interest rates. This can give you a handle of what you’re up against. A credit card manager app called Tally is quite useful and free to use.
The next step is choosing a repayment method that accelerates payoff. There are two repayment methods that have helped many people overcome credit card debt–debt snowball and debt avalanche.
Dave Ramsey popularized the debt snowball and many others have shared the benefits of the debt avalanche method. From personal experience, the right method to choose is the one that motivates you to pay off the debt aggressively.
I bet you were hoping I tell you which method to use. But, the choice really depends on what method is the switch that turns on the motivation to aggressively pay off the debt quickly.
Debt Snowball Method
The debt snowball is a method to repay credit cards by tackling the smallest balance first. After the smallest balance is paid off, its payment is added to the repayment of the next smallest balance. Think of your payment to one card increasing (like a snowball growing larger as more snow is compacted) each time you’ve paid off a balance.
This method might not be the best choice mathematically because it doesn’t pay attention to the interest rate charged to the balances. So a higher interest rate credit card with a larger balance may accrue more interest as you focus your attention on small balance cards.
The benefit of this method, however, is on the motivational aspect of paying off one card sooner.
Debt Snowball Example
- Credit Card 1 – $500 Balance – $25 Minimum Payment
- Credit Card 2 – $6,300 Balance – $146 Minimum Payment
- Credit Card 3 – $7,000 Balance – $200 Minimum Payment
Read more about this method here.
Debt Avalanche Method
The debt avalanche is a method of credit card debt repayment which focuses attention on repayment of debt with the highest interest first. Once you’ve paid the highest interest you move onto the second-highest interest credit card. Then, you continue to move down the list until all debt has been paid. Similar to the snowball method, you use all prior payments from paid off debt to the next credit card balance essentially creating an avalanche of falling interest payments.
This method makes the most mathematical sense since you are focused on eliminating debt with the highest interest rate thus lowering the cost of the debt. However, math aside, motivations are quite different for each individual person.
Debt Snowball Example
- Credit Card 1 – $5,000 Balance – 20.99% – $89 Minimum Payment
- Credit Card 2 – $6,300 Balance – 14.99% – $121 Minimum Payment
- Credit Card 3 – $500 Balance – 9.99% – $20 Minimum Payment
Read more about this method here.
Which method is better to get out of debt? Debt Avalanche or Debt Snowball?
If we were to go with the math, the debt avalanche method would make the most sense. Since you’re paying off credit cards with the highest interest rates first you are minimizing the total cost of carrying the debt from month-to-month.
However, debt payoff is about what motivates you to remain aggressive with repayments.
Personally, I used the debt snowball method because having one card completely paid off was a milestone event in my debt-free journey. It motivated me to continue tackling the other cards.
Should you consider a debt consolidation loan?
There are benefits to consolidating credit card debt into one loan because you often get a fixed lower rate with a set payoff date.
I recommend reaching out to your local credit union or community bank and inquiring about debt consolidation loans or personal loans. They often offer lower rates and have no fees. But I’ve found many do require all credit card debt be included, paid off, and cards closed. And you might be limited with the amount you can consolidate such as a $10,000 loan limit for most credit unions I’ve researched.
In this case, consider consolidating with another financing provider that often have higher limits and competitive loan rates and terms. You can find options by checking out the financial marketplace. Many of these financial services companies allow you to check your rate with a soft inquiry to your credit (does not impact your score).