If you are currently struggling with paying off your credit card debts, then this short article will help you understand your way out of this situation. Suppose you have outstanding balance on multiple credit cards. In such situations you can consider one of the following two methods.
The Snowball Method
In this method, a borrower continues to make minimum payments due in time. They do not miss any payment due date. At the same time, they try to make some extra payments along with the minimum payments on the card that has the smallest balance. So, here they are working from smallest balance to the largest balance. In other words, the snowballing method starts with the target of paying off the smallest balance first, and then moves to the next larger balance and so on. This approach is good for those who need immediate results to remain motivated in paying off their debts. Because they see the smallest balance credit card paid off first, they become convinced that their efforts are bearing fruits. And, thereby they feel more motivated to continue the efforts to pay off all credit card debts.
The Avalanche Methods
In this method, a borrower keeps paying minimum payments on time. Then, instead of making extra payments on the smallest balance credit card (as in the Snowball Method), this time they will make extra payments on credit card first with the highest interest rate, regardless of its balance size. In other words, they will pay as much as they afford on the card with the highest interest rate until it is completely paid off. Then, they take on the next highest interest rate card and in addition to the minimum payment, they keep paying something extra on it. This method is best for those who can stick to long term goals even without seeing any immediate results. Because when you are attacking highest interest rate balance first, you may not see the desired results immediately. It takes time, so you need patience with this approach. In brief, to be able to pay off your debts, remember that not all methods are appropriate for everybody. Depending on your own financial situation and psychological traits, you will need to adopt a plan and start to act upon it.
By Abdullah Noman, PhD, CFP