Managing debt can get overwhelming, especially with different minimum payments, juggling cards with the high interest rates, and deadlines stretched across the calendar.
Managing your own personal finance is never really a snap. And with credit card debt, the math can get extra-hard too.
A systematic method can streamline debt repayments, save you money on interest charges and late fees, and get you out of credit card debt faster.
Two methods currently rank as most popular: the debt snowball method and the debt avalanche method. Each has its own advantages, and both can deliver a boost to your credit score and leave you with the smallest debt possible.
Let's look at how each method works, see which one fits your style, and look briefly at a third way - a data-smart Bright Plan with automatic payments.
With the debt snowball method, you’ll prioritize cards according to the size of their balance - and quickly build momentum.
You’ll start by paying off the card with the lowest balance.
You'll still make minimum payments on all your other cards - but you'll pay more on the card with the lowest balance. It's your first card you'll target with larger payments than the others.
Once you pay off the first card, you'll move on to the next - the one that now has the lowest balance.
With one less minimum payment to make, you can apply what you used to spend on the first paid-off card and add it to your payment on the next one.
That's how things "snowball." You target the cards you can pay off the fastest, and as you go, you bring more funds to your efforts, using the minimum monthly payment from the cards you've just cleared.
You’ll quickly have fewer debts and balances to manage, you’ll see progress fast, and you’ll feel real momentum.
The debt snowball method forces you to focus your attention one debt at a time. You'll also feel a real thrill every time a credit card is paid off.
You’ll feel empowered and in control when you pay off that first debt - and again when you move to the next. The accomplishment is intoxicating, making it easier to stay on track.
The debt snowball method still takes planning and organization, and the thrill of paying off card debt might not be a big deal for everyone.
But it's relatively simple and straightforward.
Debt snowball vs avalanche
With the debt avalanche method, you’ll prioritize credit cards with the highest interest charges. The idea is to minimize your interest payments as fast as possible.
But it takes extra math. And it takes more than comparing APRs and interest rates.
With the avalanche method, you'll target the card with the highest interest charges - which can be different from the card with the highest interest rate.
Let’s say Card #1 has a high interest rate, but it carries a low balance. That can actually result in low interest charges every month.
And let’s say Card #2 has a low interest rate, but it carries a high balance. In this case, with this card, you might actually see higher interest charges each month.
With the avalanche method, you’ll target Card #2 first, the debt with the highest interest charges.
Like the debt snowball method, you’ll keep making the minimum payments on all your cards. But with the avalanche method, you’ll focus on paying off the card with the highest interest charges.
At the end of each month, you'll need to check on your progress - and make sure the highest interest charge is still on the same card. As you go and you target Card #2, you might find the highest interest charges start to come from Card #1.
For the mathematically minded, the avalanche method has strong appeal: you're always targeting the highest interest debt.
Your focus might shift month to month, so you might not clear a card right away. But you'll pay less in interest charges than the snowball method. If you can handle time and effort, you'll save more money with the avalanche method.
But if you need regular inspiration, the debt snowball method simplifies the work and boosts your spirit - even if it costs more in the long run.
Both methods are effective for clearing large and small debts. And both can work on more than credit cards, like car loans, student loans or anything that involves debt repayment.
Both methods also can boost your credit report, ensuring regular on-time payments, lower credit card balances, and eventually a total debt payoff.
Paying down debt always takes some discipline, organizing your bills and managing them month to month. But lenders can reward you with better credit down the line, and you'll probably end up with extra money in your wallet.
Think about which method makes sense for you and your financial situation.
Bright offers a third way: with a personalized Bright Plan, we can handle your payments for you, finding the fastest, smartest ways to pay off your debts - automatically every month.
Bright uses a data-smart approach with a new patented system called MoneyScience™. MoneyScience™ is built on 34 algorithms with top-grade security, developed by over 120 experts and tested on over 50,000 users.
With a personalized Bright Plan, we'll analyze your debts, learn about your spending habits and make smarter choices about paying off your cards and loans. Bright makes payments for you on time every month, so you'll never pay another late fee, and even adjusts when your spending habits shift - automatically.
Along with debt management, a personalized Bright Plan can help you build more savings and invest in a future that's all yours.
Amit is a Computer Science graduate from I.I.T Kanpur. He is a highly experienced data science system builder. He was with InMobi for 7 years