“I don’t get it. I make sure to pay the minimum on time every month, just like the credit card company said to do. Why is my debt going up?”
This is a real question from a career professional to her sister, who worked at a credit card company. It’s not her fault. The fact is, credit card companies don’t want you to pay off your debt. Your interest payments keeps them in business. What’s more, to make sure you keep paying that high interest, credit card companies print subtle marketing messages such as, “make sure to send in your minimum payment on time every month!” It almost sounds like they’re trying to help you, right? They are not.
Are you stuck in minimum payment hell?
Faithfully paying your minimum payments every month but not seeing a dent in your balances is soul crushing for sure. But let’s be real – if a minimum payment is all you are throwing at each balance, you are just dog paddling while the current gets stronger.
Even if you can only come up with a small amount of extra cash each month, it’s enough to start to DIY your debt. And starting is the most important step. Once you choose a strategy, put it into play and set it on automatic. This will build momentum and you will be on your way.
Let’s assume you’re able to scrounge up an extra $100 a month to attack credit card debt. Here are two different credit card debt payoff strategies. Before deciding which method you want, you’ll need to download a statement from each of your accounts. (It will probably take you all of 20 minutes.)
Information needed before you start:
- Credit card balances on each account.
- Interest rate charged on each account.
Option 1: Pay the lowest Balance First (Snowball Method)
Here’s how it works. Throw that extra $100 at the account with the lowest balance in addition to your monthly payment. This means that if your monthly minimum payment is $150, increase your payment to $250, until the lowest balance is gone. Then comes the next step. Once the first card is paid off, you then take that $250 and attack the next card, adding it to the minimum payment.
See how that works? That snowball payment against your debt gets bigger and bigger, without you having to put in extra cash beyond the $100.
- It will take less time to pay off the first card because you are targeting the lowest balance.
- Once you’ve paid off the first card, your pay off power increases, so the speed with which you pay off the next card also increases. You start small and build momentum over time.
- It’s motivating. Paying off one of your accounts feels good and gives you the self-confidence to keep going. Being able to throw larger and larger payments at your balances helps you see your impact.
- Paying off an account can have beneficial effects on your FICO credit score.
- Your lowest balance may not be the debt that has the highest interest rate. The higher the interest rate, the faster your debt increases. It is more expensive to carry debt on a higher interest rate card.
- You may end up paying more interest in the long run.
- It may take you longer to pay off your total debt balance.
Option 2: Pay the Highest Interest Rate Card First (Avalanche Method)
With the Avalanche Method, you throw that extra $100 at your highest interest rate in addition to your monthly payment. This means you increase the minimum payment of your highest interest rate card by $100. As the balance lowers on this card, less money is charged in interest. Your debt will cease to increase as rapidly while you are actively lowering the balance.
- You will save more money in the long run.
- You will pay your total debt balance off sooner.
- If your highest interest rate card is also your highest balance card, it may take you longer to pay off, and you could lose motivation. Math is your friend here. If you need motivation, do the math.
Which method is best for me?
Look at your balances and your interest rates and ask yourself some deep questions. Are you the type of person who is likely to give up without seeing results? Perhaps the Snowball method is best. On the other hand, if math and logic are enough to keep you motivated, attacking the biggest and baddest debt first using the Avalanche method may be more your style.
This sounds complicated but it isn’t. You only have to make one decision. Which card do I throw that extra $100 bucks at?
Must Do Tips
1. Set and Forget
- Make sure you’ve budgeted an extra $100 for your payment.
- Increase the minimum payment of the card you are going to attack first by $100 and set it on automatic payment. This is crucial. We are creatures of habit. If you set it on automatic, you will create a good new habit for your money journey.
2. Don’t Use Your Cards
- Put your cards on freeze. Seriously, drop them in a tupperware box filled with water and put them in your freezer if you have to. (But don’t close your credit card accounts as this could impact your credit score.)
- Remove any saved credit card information on shopping sites like Amazon.
- Cancel any recurring monthly fees that are not absolutely critical. If they are critical, move them to a debit card.
You may be thinking that a measly $100 extra a month isn’t going to do much to your overall debt. But if you’d started this a year ago, you would have thrown $1,200 at your balances by now. Wouldn’t you feel better knowing that you are addressing the problem than allowing it to continue growing? Try to find, or learn to live without, an extra $100 a month, and next year you will be in a better position. Start, keep going and don’t give up.