Paying Off Credit Cards
There are hundreds of books and blogs that highlight the dangers of credit cards. You don’t need to read the fine print to understand credit cards. Card companies (banks) make money by charging you interest. They want to charge you as much interest as possible so they make as much money as possible. In return, they give you the freedom to buy things you can’t afford. And, to sweeten the deal, they give you rewards and discounts that are never worth as much as you pay in interest. It’s crazy. The entire credit system is insane, but that’s another story.
There are tons of strategies to pay off your credit card debt, but we’ll highlight two of them: Let’s use the Carter Family, John and Tina, below you will find the family’s credit card debt.
Strategy 1: Avalanche - pay off highest interest rate first
In this strategy, John and Tina would pay off the highest interest rate card first, the AMEX. While they’re paying off the AMEX, they’ll make minimum payments on the other cards. Once they’re done with the AMEX, they’ll move to the next highest rate card, the VISA. They’ll keep going through this process, paying off cards in descending order of their interest rates.
This strategy saves money. John and Tina will pay the least total interest by paying the card with the highest interest first.
Strategy 2: Snowball - pay off lowest balance first
In this strategy, John and Tina would pay off the lowest balance card first, the Home Depot Card. While they’re paying off the Home Depot card, they’ll make the minimum payments on the other cards, Once they’re done with the Home Depot card, they’ll move to the next lowest balance card, the Target card. They’ll keep going through this process, paying off cards in ascending order of their outstanding balance.
This strategy builds momentum. It’s psychological. John and Tina will eliminate the Home Depot Card quickly. They’ll see and feel progress. Small victories will keep them motivated to continue and eventually pay off all their debt. With this strategy, John and Tina may pay more total interest, but they’ll have a higher likelihood of success.
Pick the strategy that works for you. If you’re highly disciplined, patient, and persistent, the Highest Interest Rate strategy will work. If you need on-going motivation, try the Lowest Balance first. Don’t worry about finding the optimal solution. Don’t start running creative calculations. Just pick an option, stick to it, and you’ll pay off your credit card debt!
What else? Do you have a debt payoff plan? How does it compare to this approach?