Be honest, do you feel a sense of urgency to be debt-free? Or are you sitting on a never-ending credit card balance from month to month? If you are, you're not alone.
A CreditCards.com survey of 2,000 people revealed that 28 percent don't pay their cards in full each month. A separate study showed that the debt-free population has dropped from 27 percent to 23 percent, while household debt continues to climb. And that could be costing you thousands of dollars.
Of the CreditCards.com survey, 32 percent said they kept a balance because they needed the cash to cover daily expenses. That makes sense, but in the end, the debt ends up costing you a lot more because of interest rates and fees.
The average interest is about 17 percent, which means consumers are paying an annual $100 billion in fees and interest. Total credit card debt is at more than $1 billion, according to the Federal Reserve.
When you have a high amount of debt and different kinds of debt, what should you pay off first? Where do you even start? It's overwhelming… so maybe you choose to not think about it.
Perhaps this is the real reason people aren't paying their credit card bills in full each month. So, where do you start?
Snowball focuses on paying off small balances first, regardless of interest. Avalanche is the opposite because it starts with the biggest balance first.
Despite what you may read or hear, snowball and avalanche are equally effective in paying off your debt. It really comes down to personal preference and what keeps you motivated to keep going.
The debt snowball method focuses on small wins that can help you build momentum and motivate you to continue paying off your debt. With snowball, you choose the smallest debts first, such as that lingering $300 out-of-pocket dental bill.
Using the debt snowball method, you start paying off your debts according to the smallest balance first, while paying the minimum on the rest.
As you pay off your debt, you'll find more wiggle room to make additional or larger payments to your remaining debt (hence the name, snowball).
Personal finance experts sometimes argue that avalanche is the better way to pay off debt because you're tackling the ones with the highest interest first. It also gives you clarity on the order of which debt to tackle, especially if you have several credit cards to pay off.
But the truth is, when you compare avalanche vs. snowball, there isn't a huge difference in the amount of money you'd save. Again, it really boils down to your preference. As long as you stay focused and dedicated to being debt-free, you'll be successful no matter what.
MoneyUnder30.com outlines a useful example showing the monetary difference between choosing debt snowball and avalanche, with a fictional couple Joe and Suzie. Joe is Team Avalanche and Suzie is Team Snowball.
The pair will pay $1,000 each month into their debt, including the minimum payments. Here's what the breakdown looks like.
Here's what the outcome of each strategy looks like:
|Method||Time to Pay Off Debt||Interest Amount|
|Joe||Avalanche||5 years and 4 months||$8,394|
|Suzie||Snowball||5 years and 5 months||$9,378|
|Difference||$985 over 5 years (or $15 a month)|
Joe's avalanche method will save the couple $985 over five years. This is a good amount of money that can certainly be the deciding factor in which method they should go with.
However, if you break it down, it only comes out to about $15 a month. If staying motivated is a critical part of the payoff process, $15 a month is probably a small price to pay. If the couple goes with avalanche but finds it difficult and gives up quickly or accrues more debt, it definitely won't help their situation.
With either method, you'll funnel every penny you can into the debt until it's paid in full. Once that happens, move on to the next debt.
Another great way to stay motivated is to check your credit score as you pay off each debt. Paying off debt increases your overall credit score because it improves your debt-to-income ratio.
Another crucial part of adopting either strategy is to not incur any more debt in the process, as it will make the entire process that much longer. Don't use your credit cards during this time and tighten your budget so you can concentrate your efforts on being debt-free.
There's no harm in trying both methods to see which one works best for you and which one speaks more to your debt-tackling style.
If saving money on interest is super important to you, go with avalanche. If you want to savor the small wins, snowball may be a better fit.
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