Paying Off High Interest Debt
In continuation of the personal finance checklist series, today I am going to talk about the two common approaches used to pay off high interest debt – most common scenario being household credit card debt.
I am not going to bore you with national average household credit card debt statistics. The reason is simple – it is not going to make one iota of a difference in your personal finance situation or mine.
What I will tell you is this – you are on the negative side of the power of compounding. If you have credit card debt, you are making someone else very rich and you are paying dearly for it with your hard earned money!
I am going to cut the chase and get straight to the point – “Debt Snowball” and the “Debt Avalanche” are the two common approaches used in paying off high interest credit card debt.
It all starts with itemizing your debt.
Itemize Credit Card Debt
Regardless of the approach, the first and foremost thing to do is to itemize credit card debt in a spreadsheet and know how much you totally owe across all your credit cards.
Then, stop using credit cards, come up with a budget, live within your means, and use one of the strategies to pay off your credit card debt.
These are basic pre-requisites for either approach to work for you.
Debt Snowball Method
In this method, you focus on paying off the card with the lowest balance while paying minimum amount due on all the other credit cards, regardless of the interest rate on all credit cards.
You keep repeating this until your last credit card if fully paid off in full.
You can read my post here on how I used the debt snowball method to pay off my $27,000 credit card debt within three years.
Debt Avalanche Method
In this method, you focus on paying off the credit card with the highest interest rate, while paying minimum amount due on all the other credit cards, regardless of the balance due on all the credit cards.
You keep repeating this process until your last credit card is paid off in full.
You can read how Kelley Long (CFP) paid off her credit card debt using the debt avalanche method.
She suggests a tool called debt blaster which is very useful and handy to determine how long it will take to pay off your debt if you choose to go this route.
Debt Snowball Or Debt Avalanche
Which method is better? Debt Snowball or Debt Avalanche?
Debt Avalanche would be the fastest way to pay off debt – that is just plain and simple logic.
Now, if we applied plain logic and lived within our means, then we would be debt free and couldn’t care less for either approaches.
Reality is, if you are in credit card debt, and want to be debt free, you need to pick the strategy that works for you.
In my case, when my last credit card was maxed out, it was moment of despair!
I didn’t even know how much I owed totally across all my credit cards.
I had lost all confidence in myself when it comes to managing my finances. I was afraid to look at how much I owed across all my credit cards.
I was in despair! This is when I had an “Aha moment!”
These thoughts came to me – I must itemize my debt and start by paying off the credit card with the lowest balance.
It took a lot of courage for me to itemize my debt – I did it! It came to a total of about $27,000.
Then I focused on paying off the credit card with the lowest outstanding balance of $250 – I did it!
Without even knowing what Debt Snowball method is, I was applying it and it worked for me.
My first victory of paying off the credit card with the lowest balance paved the way to my victory.
Long story short, I paid off my debt within 3 years and have been debt free for more than a decade now.
Combining Debt Snowball and Debt Avalanche
If you are in a position like I was in, start out with the Debt Snowball approach.
Once you pay off a few credit cards, you morale will get a boost!
You will gain confidence and be able to see the light at the end of the tunnel.
At this point, you might want to switch over to the Debt Avalanche method to pay off your debt.
The main objective is to get out of debt.
Pick a strategy that you think would work for you and learn as you go.
I cheer for you to be debt free!
Have you paid off your credit card debt?What has worked for you? If you have credit card debt, which method do you plan on using to pay off your debt? I would love to hear your feedback. If you liked this post, please share this in social media.