As most of the more than 80% of Americans who own and use them know, credit cards can deliver a long list of benefits to consumers. These can range from helping credit card holders increase their purchasing power and simplify their bill payments to offering the opportunity to earn rewards, delivering purchase protections, helping with credit-building efforts and more.
But of course, when credit cards aren’t used responsibly and paid off in a timely manner, they can also lead to debt troubles. And with this in mind, a March holiday has been created to serve as a reminder to keep your credit card debts in check. Observed each year on March 21, Credit Card Reduction Day is designed to spotlight the importance of taking more control of your finances and, more specifically, of taking action to pay down your credit card debt.
2 leading debt-payoff strategies: Debt snowball vs. debt avalanche
According to research, the average American is carrying over $6,500 in credit card debt. But with a strong strategy and a concerted effort, it’s possible to pay your credit card debts down completely, even if financial realities require the process to be a gradual one.
Looking to gain insights on how to pay off debt and save money? Read on for a quick rundown of two of the top strategies for paying down your credit card debts — the debt snowball approach and the debt avalanche approach.
The debt snowball approach
For those seeking to quickly reduce the number of credit card balances they’re carrying, the debt snowball approach can be an effective strategy for making this happen, as it prioritizes paying off the lowest balances first. With this credit card payoff plan, consumers pay the minimum balance on each of their credit cards each month, then devote any additional available funds to paying down the credit card they own that’s carrying the lowest balance.
Once all the debt on the first targeted credit card has been eliminated, the focus can turn to paying off the credit card carrying next-lowest balance, with any additional funds available after all minimum payments are made going toward eliminating this debt. And as additional credit card debts are fully eliminated, the process is repeated, with the consumer moving on to targeting the next-lowest balance until all the cards are paid off.
Because the debt snowball approach can quickly reduce the number of credit card debts owed, it can help consumers become more motivated to eliminate their other outstanding balances. But because it can allow the credit cards carrying the highest interest rates to continue accumulating interest in the meantime, this approach can also result in a higher total amount paid to become completely debt-free — plus a longer route to getting there — than its leading alternative, the debt avalanche approach.
The debt avalanche approach
For those looking to minimize the total interest (and the total amount) they pay during the process of eliminating their credit card debts, the debt avalanche approach is a winning strategy. Rather than targeting the lowest balance like the debt snowball approach does, the debt avalanche approach instead prioritizes paying off the cards carrying the highest interest rates first.
With this approach, consumers pay the minimum balance on each of their credit cards each month, then put any additional available funds toward paying down the credit card carrying the highest interest rate. Once that card’s balance is zeroed out, the focus turns to paying off the card carrying the next-highest interest rate, and the process is repeated until all of the consumer’s credit card debts are fully eliminated.
When compared to the debt snowball approach, the debt avalanche approach can ultimately lead to a lower amount of money paid in interest and overall, as well as a quicker route to paying off all credit card debts.
A personal choice
The best choice between the debt snowball approach and the debt avalanche approach depends on your personal financial situation and your personal preferences — and some consumers may even choose to employ a mix of the two strategies. (For example, a consumer with one especially low credit card balance may choose to focus on paying that one off first, regardless of the interest the debt is carrying, then move on to targeting his or her cards carrying the highest interest rates.)
But whatever route you choose, eliminating credit card debt can help you improve your credit score and your overall financial well-being, all while freeing up funds for other goals such as building savings and making investments. This March, use Credit Card Reduction Day as your inspiration to take more control of your finances and pay down your credit card debts!
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