Best Method to Pay Off Credit Card Debt – Snowball Method vs. Avalance Method

Hello Wealth Builders!

Did You Know?

According to USA Today, a statistics made by Federal reserve shows that an average U.S. household debt is $ 137, 063. Disturbingly, a statistics produced by U.S. Census Bureau shows that the median household income was just $59,039. That is a 232% debt to income ratio!

Why having a budget can help us pay off our debt faster

Okay. Before we talk about ways on how to pay off our credit-card debt fast, I think it is important to remind everyone about the importance of having a budget to follow because of the following reasons:

First, it will make us aware that our money is limited. Believe it or not, by simply accepting this simple fact, it will help us conserve our money because we are aware that it will run out if not handled properly – that is good news to our wallet!

Second, having a budget will help us understand where our money goes instead of wondering every month where our money went. If we know where our money goes, then we can devise a plan to make sure it goes where it needs to go.

Third, we will realize that we spend a lot of stuff that we don’t really care about. Creating a budget would force us to face this ugly truth and it is very likely that we would help us change our spending habits.

Automating our personal finances will increase our chances of paying off our debt fast

Another thing that I want to talk about that I believe will help us increase our chances of successfully paying off our debt is for us to automate our personal finances. In other words, we should set automatic transfers once our budget is in place.

You know the saying, “Use your head and not your heart when making decisions”? Okay, fine. I kind of paraphrase it, you know what I mean.

Here is the deal, when we are mostly using sound reasoning when we are creating our budget. However, when it is time to spending our money, we are most likely letting our emotions dictate where our money should go. If we create a monthly budget then set the transfers automatically, then the only money that we should get every paycheque is the money left after we allocated our it on paying off our debt/emergency fund/savings. 

Now that those two things are out of the way, let me introduce to you two ways to pay off debt. The first method is called the debt avalanche method while the other one is called the debt snowball method.

Pay Off Credit Card Debt Quickly – Debt Avalanche Method

What is the avalanche method?

Avalanche method is a debt paying method where we prioritize paying the debt with the highest Annual Percentage Rate (APR) while paying only the minimum payment for the rest of our debt.

This is a good method since getting rid-off the debt with the highest APR means we will have to pay less on interest and more on principal balance over the long run.

what-is-debt-avalanche-method

How to do the avalanche method?

Here are the steps on how to do the avalanche method:

Step 1: Draw a table with three columns then label the first column, “Description of Debt”, the next column, ” Principal Balance or Total Debt”, then the final column, “A.P.R.”

Step 2: Collect all of your credit card statement and look for  the A.P.R. and credit balance for each credit card

Step 3: Go back to the table that you made earlier, write the name of your bank plus credit card company on the first column, your credit balance on the second column, and finally the APR of the first card

Step 4: Arrange data according to its A.P.R., placing the highest A.P.R. on the top then descending order

Step 5: Determine the minimum payment of all of your credit cards except the one with the highest A.P.R.

Step 7: Add the minimum payments for each card to find the total amount

Step 8: Look at your budget to know how much of your income is allocated for your credit card debt

Step 9: Subtract the total minimum amount payments from your credit card debt budget

Step 10: Put the difference from step 8 into the credit card with the highest A.P.R.

Once you paid off the first credit card then moved on to the next one that has the highest A.P.R.

Pay Off Credit Card Debt Quickly – Debt Snowball method

What is the snowball method?

The snowball method of paying credit card debt, or any types for that matter, where we prioritize paying off the debt with the lowest balance.

Dave Ramsy is a proponent of this method because he believes that personal finance is, “20 percent head knowledge and 80 percent behavior”. According to Ramsey, it is likely that we get into debt because we can’t control our emotions so we might as well use our emotions to get out of debt as well.

What I believe he is trying to say here is being to pay off one credit card will result to emotional and psychological victory which we can use to give us momentum to pay off the rest of our debt!

The steps are similar but unlike the avalanche method where it gets rids of the credit card with the highest A.P.R., Dave Ramsey wants you to pay first the one with the lowest balance.

what-is-debt-snowball-method

How to do the snowball method?

Here are the steps on how to do the avalanche method and as you can notice, everything is the same. I just change A.P.R. into lowest credit balance:

Step 1: Draw a table with two columns then label the first column, “Description of Debt”, and the other column as, ” Principal Balance or Credit Balance”.

Step 2: Collect all of your credit card statement and look for the credit balance for each credit card

Step 3: Go back to the table that you made earlier and write the name of your bank plus credit card company in the first column, then your credit balance on the second column

Step 4: Arrange data according to its lowest credit balance, placing the lowest credit balance on the top then arrange the rest in an ascending order

Step 5: Determine the minimum payment of all of your credit cards except the one with the lowest credit balance

Step 7: Add the minimum payments for each card to find the total amount

Step 8: Look at your budget to know how much of your income is allocated for your credit card debt

Step 9: Subtract the total minimum amount payments from your credit card debt budget

Step 10: Put the difference from step 8 into the credit card with the lowest credit card balance.

What If My Paycheque Is Just Not Enough?

I understand that money is tight for some of us and even how much well we stick on our budget, it .is still not enough if this is you, then I suggest to consider doing alternative sources of income. Here are some of the things that you can do.

  1. Blog for income. If you do not know where to start how to blog, consider taking advantage of Wealthy Affiliate’s FREE starter pack. You can learn more about blogging for income here: “How Do People Make Money From Blogging?” or check out my article on, “The Thing I Like About Wealthy Affiliate” to learn more about Wealthy Affiliate.
  2. Want to sell online? Check my articles on “How To Sell on eBay”, “How to Sell on Amazon”, and “How Can You Make Money from Affiliate Marketing”

What About You?

That’s all I have for you today. What about you, have you done doing one or both methods? What is your experience? Is there step/s I am missing or step/s that I included that is not important?

Your feedback is important to me and to our community. Please feel free to share it on the comments section down below.

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4 thoughts on “Best Method to Pay Off Credit Card Debt – Snowball Method vs. Avalance Method

  • 01/27/2019 at 4:12 AM
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    Thank you for this informative article. My husband and I married 1 year ago. When we moved in together, we didn’t do any sort of budgeting until we had huge credit card debt that went a little beyond our control, paying extra 100s of $$$ extra on interest! If we had read this article the months before our marriage, I’m sure we would be in a better situation today. Thank you for providing the steps to do the avalanche method and the snowball method. Will apply these methods with our credit cards from now on.

    Reply
    • 01/28/2019 at 12:58 AM
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      Hi Shellykh,

      I’m glad that you find the article to be helpful. I am sorry about the struggles that you and your husband must face with regards to finances especially at the beginning of your long-lasting relationship.

      I want to encourage you however that there is always hope and there is always a way to get out of debt.

      Hopefully, (if you are still in debt) you will choose one of the methods that I have shared and apply it so you may be able to pay off your credit card debt as quickly as possible.

      Regards,

      John Greg

      Reply
  • 01/27/2019 at 4:26 AM
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    This is a great post! I have never heard of either of these methods but they both make sense. If I understand it correctly you either fight the biggest one by aggressively paying it off or you attack the smaller ones that you can’t definitely defeat in order to build up your confidence to tackle the bigger debt. Is that right?

    I think that getting additional income is definitely a great way to help you defeat your debt but also once your debt is paid off you now have a second or even third income stream that may even become a passive source of income after enough work and time.

    Is it a good idea to reduce all your other monthly expenses down to an absolute minimum (a crazy low amount but for a short while) and then put any additional money towards the debt?

    Thanks for sharing this!

    Reply
    • 01/27/2019 at 11:35 PM
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      Hi,

      I’m glad that you like this article, and yes you are correct. Either pay the credit card with the highest APR or start paying the one with the lowest balance.

      I like your suggestion on reducing your spending to an absolute minimum for a short period of time to quickly pay off your bills. It is like being in a marathon. You do not and cannot sprint throughout the entire race but you can do it from time to time. Paying our debt is like a marathon. It is better to be consistent but whenever we get a chance, we should take it and sprint towards the finish line.

      Regards,

      JG

      Reply

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