What is the Best Credit Card Payoff Strategy?

Overall the snowball method is recommended as real-world data suggests people pay off debt faster with this strategy. 

Once you’ve made the decision to pay off your credit card debt, you need to choose how you want to do it.

Paying off debt requires an incredible amount of mental and emotional fortitude, as doing it can take years or even decades.

Choosing the wrong method can lead you to give up on your repayment or taking longer than you expected. Read below to see our reviews on each – and which is best for you.

The “Snowball” Debt Payoff Strategy

Personal finance legend Dave Ramsey first popularized the debt snowball method, which recommends paying off debt in order of smallest balance to largest. Ramsey says this keeps people motivated because they see changes faster.

It turns out that Ramsey’s advice is right. A study from the Kellogg School of Business at Northwestern University found that consumers who used the snowball method paid off their debt faster.

There is ample evidence the snowball method works. Three large field experiments based on actual credit card data published in the Journal of Consumer Research found “focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.”

The researchers found this motivating effect is most pronounced when the repayments are concentrated into consumers’ smallest accounts “because consumers tend to infer overall progress in debt repayment from the greatest proportional balance reduction (proportion of starting balance repaid) within any one account.”

This aligns with a large amount of other research on the power of small wins to keep people motivated.

If a borrower has thousands of dollars in debt, it will likely take them years or even decades to pay it off. Sustaining a debt payoff over that period of time requires incredible resolve and will-power, which can waver if it feels like the goal is too far away.

That’s why breaking the goal into mini victories is so successful. It allows people to see that their changes are having a difference and to feel proud of what they’ve accomplished.

The Avalanche Debt Payoff Strategy

The avalanche system says borrowers should focus their repayment efforts on the debt with the highest interest rate. They’ll save the most money on interest through this method.

Here’s how it works. Jim has has a $15,000 balance on a credit card with 24% APR and a $5,000 balance on an auto loan with 4% interest. Jim has an extra $100 to pay every month and needs to decide which loan to pay off first. By choosing the avalanche method, he’ll save $1,588 in interest overall than if he chooses the snowball method.

This method is probably best for people who don’t feel emotionally attached to their debt and want to save the most on interest as possible.

But as researcher Remi Trudel notes in Harvard Business Magazine,  “unless it’s possible to consolidate those debts at a substantially lower rate, our findings would argue against pooling debts into a single larger one as this can actually be demotivating and could slow progress in repayment.”

Emotional Debt Targeting

If you’re struggling with many different kinds of debt, picking which one to pay off first can be overwhelming. Studies show debt can cause anxiety and depression and even lead people to commit suicide.

Because credit card debt is such an emotional problem, it makes sense to tackle it emotionally. When you list all your debts, rank them in order of which ones make you feel the most anxious.

Let’s say you have student loans, car loans, credit card debt and money you borrowed from your sister. Even if the credit cards have a higher interest rate and the student loans have a higher balance, it might make more sense to pay back your sister first.

When our family members and friends lend us money, it can create an awkward power dynamic that can affect your relationship. In this scenario, you’d want to pay back your sister first, even if she’s not charging you any interest and says she doesn’t care when you repay her.

How to Decide

When you’re trying to decide which method to use, you have to consider what kind of debt you have and what kind of personality you have. If you owe a lot of money to various relatives and friends, the emotional strategy might be best.

But if you owe $30,000 on a credit card with 25% APR, then a concentrated avalanche method is best for you.

Overall the snowball method is recommended as real-world data suggests people pay off debt faster with this strategy. “Pay the smallest debt first” is both easy to understand and follow. But you can also switch between strategies if one isn’t working for you.

Perhaps the best advice is just to get started.

Zina Kumok

Zina Kumok

Certified Financial Health Counselor, Certified Credit Counselor, and freelance personal finance writer/speaker. I paid off $28,000 of student loans in 3 years. Now, I teach people how to be mindful with their money. ConsciousCoins.com

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