This post is written by Craig Ford, writer at Money Help for Christians.
The average American family has too much credit card debt. According to results posted by Visual Economics, the average American family makes $43,000 per year and owes $2,200 in credit card debt. Since not everyone even has credit card debt, that means those who do typically have debts in excess of a couple thousand dollars.
If you are currently working on getting out of credit card debt, here are three effective strategies to consider.
#1. Pay Off Highest Interest Debts First
This is the oldest approach to debt repayment. It is, in fact, the approach that makes the most mathematical sense. Simply make a list of all your debts, and then start to pay off the debts that cost you the most (determined by interest rates).
Thus, you would pay off the 17% Capital One card before the 15% American Express card. Last of all, you’d pay off the 10% credit union card.
In the long run, this method saves you the most money, and theoretically, helps you get out of debt the fastest. But life and debt repayment are about a lot more than money. However, when you look closely at credit card consolidation and balance transfers, you realize that math is not the heart of the debt issue.
#2. The Debt Snowball
If you’ve heard of the debt snowball, it is likely because Dave Ramsey promotes the debt snowball.
With the debt snowball, you list your debt by amount owing instead of by interest rates.
Imagine you owed $9,000 on a Capital One card, $5,000 on an American Express account, and $2,000 on a card from your credit union.
In this case, you would pay off your cards in the following order – credit union, American Express, and Capital One. You would continue to make minimum payments on all the other debts until you pay off one debt. You would then shift your focus to the next debt.
One of the biggest advantages to the debt snowball is that it provides the quickest emotional pay off. Instead of waiting until you pay off $9,000 in debt (as you would with the highest interest), you get to do the happy dance after paying off the $2,000 credit union bill. That emotional energy will fuel your continued fight out of debt.
If you are interested in the debt snowball, you might check out this free debt snowball spreadsheet.
#3. Emotional Debts are the First to Go
The fact is sometimes we make poor choices. Choices that haunt us. Let’s say you once helped buy a $1,000 stereo for an old boyfriend. That relationship never worked out, but you still have that $1,000 credit card debt. Imagine how good it would feel to finally pay off that debt and move on.
This debt repayment strategy encourages you to list your debt in order of how passionate you are to pay them off. Perhaps one credit card company has been especially rude in their interactions. Put them first, and get them out of your life.
Again, this is a strategy that relies on emotions more than math.
Which is the best strategy?
The answer completely depends on your temperament.
I, for example, could effectively use #1 and #3 in conjunction. The reason? I hate paying interest to banks so the debt with the highest interest rate would also be the one with the most emotional pay off attached to it.
Yet, there is no denying that many, many people are following the debt snowball with amazing results. Either way, if you have credit card debt, be sure you have a game plan or steps to get out of debt and work aggressively towards whatever strategy you adopt.
What strategy do you use / do you recommend to help people get out of debt?
Be sure to visit Money Help for Christians where Craig promotes a frugal, simple, debt-free, and generous lifestyle so Christians can faithfully maximize their resources by putting them at the disposal of God’s Kingdom.
amy@twobgardening says
I agree with the snowball effect. I had three cards and paid the smaller amount off first. It gave me such joy!! I am down to one credit card, I have an emergency fund and am on track to saving 6 months worth of monthly bills. Thanks Dave Ramsey :)
Holly in Virginia says
I think just getting organized helped us immensely! My husband was paying a little bit extra on a half dozen different accounts, and making little progress. When we sat down together, I convinced him that it might be more efficient to make a plan of attack. He wasn’t sold on the “debt snowball” idea, but did agree to pay off the 4 smaller bills first. It only took us 2 months of paying minimums on the big accounts to pay off the other 4. A year later, on or around Feb 9th, we will be cc debt free!
Sonja says
We also are doing the snowball method. We are not really swimming in cc debt as much as school loans. We sat down in December, figured out our spreadsheet and will be debt free with the exception of the house in 4 years.
Nora@ The Dollar Hollering Homemaker says
We just became cc debt free but still have other debt: house, student loans, car loan. The car loan would have been the better one to pay off first but we really wanted to be credit card debt free which was more of an emotional decision.
Tara says
I would like to add one more step. Shred the credit cards. Contrary to popular belief, you don’t need them to build your credit, rent a car or pay for things online. We have only debit cards (for that sort of thing) and we have very very excellent credit ratings!
DreamingofSpring says
I was just going to comment the same thing–just QUIT using your card. If you can’t afford it — live without, fix what you already have,be creative and use something else, or start saving for it. We use an envelope system that involves a certain amount of cash for certain allowances–food, gas, entertainment ect… It’s like a game and whatever money is leftover at the end of the month–it goes into a special account for something big we “want”. A lot of the time the title on the outside of that envelope changes as we realize we can make do with what we have (for example we don’t need a bigger flat screen TV–but we really did need a new washer!!)Priorities change and I am glad I have the money when I really need it! I do however understand having to use a cc occasionally for rent ect.. been there!!
Evelyn says
I like to take into account payment size too. The snowball method is effective because it gives a small goal that you can see the effect of quickly and then when thats gone you add those efforts to the next smallest goal and see how much easier it is than before. However, if my smallest bill is say $50 per month total $1500 owed and the next one is say $100 per month total $2000 owed, I would pay off the $100 per month one that isn’t much more total because then the $100 can go towards paying off other debts quicker. If that makes sense.
april says
We just did our happy dance 2 weeks ago! We did not have CC debt but we had gotten 26 thousand behind on a home equity loan. I’m so pleased to honor God and report we paid that off aggressively over the last 12 months and now only have a mortgage debt. Once we stock up 6 months of emergency funds we’ll start hacking away at that mortgage as well! Oh Joy! It is sooo worth it.
Jolene says
I just want to say congrats to those who have alread paid off or are currently working on paying off their debt..so easy to get in it…more difficult to get out! I totally agree with the debt snowball. Dave Ramsey is great and has such smart advice. We took his Financial Peace class and loved it…I am currently reviewing the class and trying hard to stick to a budget as one of my resolutions this year…so far, so good. I agree, monetary paying off higher interest ones seems to make more sense, but when you do it that way it seems like you are more in debt longer if that makes sense.
Janet Kiessling says
To all of you w/ any sort of debt out there and we all do!!! Dave Ramsey’s book & classes are the best way to go!!!!! He is funny & he makes you think!!!! His videos are so hillarious!!!! He’s on the radio, too!!! Now, gsave some $$$ & buy his book!
Janet
Michelle says
we’re working the debt snowball on our student loans, we don’t have credit card debt or car loans, we paid off $10,000 in 7 months & it was one of the most exciting things in my life to see that first loan be paid off & then the 2nd one. I think that it’s so important to be committed to living a debt free life & to live below our means. I think to be really successful with paying off debt you have to be committed to staying debt free. We love what Dave Ramsey does, he has completely changed our lives & we’ve learned so much from taking the Financial Peace class & more importantly we’re working towards being debt free. We can’t wait to see him when he comes to Colorado Springs! :)
Citysister says
While we don’t use credit cards, we do have student loans and a mortgage. We are using the snowball method in conjunction with the highest interest so we look at the loans that are small and then pay off the highest interest one first, then the smaller low interest and then move the snowball up to the next range of loans.
Ruth says
One thing I would like to add is to not fall into the loan consolidation trap. It may seem like a great idea to consolidate your high interest loans into a low rate home loan. This could be a huge mistake as you will convert unsecured debt into a debt secured by your home. We have seen friends and family members loose their homes because of this when their income drops and they can’t make the mortgage payments. Better to be behind on your credit card payments than behind on your mortgage.
Kate M. says
We were $12,000 in debt & thanks to Dave Ramsey’s plan we are now free of credit card debt!!! It’s a wonderful feeling!!! Working on the emergency fund currently & then the house…I can’t wait to have that paid off!
Sarah Falk says
We’re so excited! Thanks to our tax refund, we will be cc debt free! We owe a tiny bit on one car and that should disappear within the next month or so! Debt free = much freer to fully follow God’s call for our lives -> missions!
Jennifer says
Hi- great post Laura!
We are also big fans of Dave Ramsey- he has helped us organize our finances and avoid some MAJOR pitfalls:-)
I wanted to add one crucial item to the “debt snowball” approach- and that is when you have paid off the smallest debt first, do NOT think “oh great, we have an extra $200 a month now.” Take that $200 that you were spending on the now-paid-off-loan, and add it to the money that you are putting towards the next smallest loan. THAT is the essence of how people are getting out of debt fastest (I see the emotional happy dance as just an added incentive). This idea can theoretically be used for any of those means, but if it takes 2 years to pay off a high-interest credit card debt first, and then only 3 months to pay off the low-interest car loan next, you aren’t getting much of a snowball effect.
To all who are working on it- keep going!!!!! You can do it!
renee says
dave ramsey’s plan is the way to go! been doing it for a year and we are knocking out debt!
Jenny says
When we were married 8 1/2 years ago, our realtor recommended what amounted to the snowball method. Even though we’re analytical and like math, we went with it b/c of his years of experience. Two years later, we were debt free – no (huge)college loans, no car payments, no credit cards! My favorite way to remain debt free now is mvelopes – a virtual envelope website – LOVE IT! Our budget is in the best shape ever! The only debt we have carried since paying everything off is for our (tiny) home, which we just remortaged to a 15 yr. mortgage. I was working as an engineer early on, but have been a SAHM since our oldest was born nearly 6 years ago.
Amy Sirk says
I found online banking helps a lot. I made sure the bill pay function was free, no point in paying for one more thing. Because I could pay a bill at any time with just a click, if I had an extra $20 I could put that on a card. Sending just a little extra every week (or however often you get your paycheck) made a huge difference. Monday I’m sending off the very last credit card payment. I will be a free woman. Woo Hoo!