Getting out of Credit Card Debt

Do you need a Snowball or an Avalanche?

By: Diana Spatoulas, KOS Senior Accountant

dspatoulas@koscpa.com

Now that 2017 is in full swing, the recent holidays of 2016 may seem like a distant memory. Colorful decorations and bright lights have been packed away and are out of sight. If it has not happened yet, soon a recap of holiday spending will make its inevitable appearance with the arrival of the credit card bill(s) — along with the requirement to remit payment.

When it comes to good spending habits, the smartest approach to staying out of credit card debt is to not spend more than you can afford. The best time to use a credit card is when you can pay off the monthly balance and avoid paying any interest. By the way, credit card interest is generally not deductible (please consult with your tax advisor). Sticking to this approach requires sound money management, the use of budgets, and, ultimately, will help you stay out of credit card debt. However, carrying credit card debt is a harsh and costly reality for many, and being free of it can seem impossible.

According to TransUnion’s 3rd Quarter 2016 Industry Insights Report, the average credit card balance per consumer is $5,648. If the balance revolves month-to-month for an entire year at an annual percentage rate of 13.76%, interest payments will total $777 — a hefty price to pay for carrying a credit card balance. If you want to stop the unnecessary drain on your wallet, the first step is to stop using the credit cards altogether. The next step is to have a strategy for paying them off; here are two that you can use:

The Snowball Method
With the Snowball Method, the focus is on paying off the card with the lowest balance. Always make the required minimum monthly payment on all credit cards, and add an amount over and above the minimum payment due on the card with the lowest balance. As the difference between what you are paying and the required minimum payment shrinks, more of your payment goes to principal. This reduces the time it takes to pay off that card. Once that card is paid off, apply this method to the credit card with the next lowest balance.

The Avalanche Method
With the Avalanche Method, the focus is on paying off the card with the highest interest rate. Always make the required minimum monthly payment on all credit cards, and add an amount over and above the minimum payment due on the card with the highest interest rate. By focusing on paying off the card with the highest interest rate first; you can save hundreds of dollars in interest. Once that card is paid off, apply this method to the credit card with the next highest interest rate.

Which Method Is Best for You?
Determining which method to use depends on your goals and level of motivation. If the satisfaction of seeing your debt eliminated in a short amount of time keeps you motivated, the Snowball Method will reward you with those small victories. If reducing the overall amount of interest your credit card balances are costing you, the Avalanche Method will save you the most money over the long haul.

For the best progress with either method, the card targeted for pay off should get the same payment amount every month. Once it is paid off, the monthly payment you were making on that card should now be added to the minimum required payment of the next card in line for pay off.

It may help you decide which method is best for you if you can see how long it will take to pay off your debt and how much interest it will cost you over time. You can simulate both methods with free online calculators available at undebt.it. and unbury.me.

No matter which method you choose, both of them will get you to where you want to be: out of credit card debt.