Debt Snowball Vs Debt Avalanche: Credit card debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.
Credit card debt is money a company owes for purchases made by credit card. It appears under liabilities on the balance sheet. Credit card debt is a current liability, which means businesses must pay it within a normal operating cycle, (typically less than 12 months).
A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company, that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. An example of a credit card is the Chase Sapphire Reserve.
Credit cards offer you a line of credit that can be used to make purchases, balance transfers, and/or cash advances and require that you pay back the loan amount in the future. When using a credit card, you will need to make at least the minimum payment every month by the due date on the balance.
What is Credit Cards Debt
Credit card debt is a type of unsecured liability that is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower’s credit card accounts will be reported and tracked by credit bureaus. The majority of outstanding debt on a borrower’s credit report is typically credit card debt since these accounts are revolving and remain open indefinitely.
Generally, credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Credit card debt can be useful for borrowers seeking to make purchases with deferred payments over time. This type of debt does carry some of the industry’s highest interest rates. However, credit card borrowers do have the option to pay off their balances each month to save on interest over the long term.
Benefits of Credit Card Debt
Credit cards are one of the most popular forms of revolving credit and offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to pay off balances to avoid high-interest costs. Additionally, most credit cards come with reward incentives such as cashback or points that can be used toward future purchases or even to pay down outstanding balances.
Credit card debt is highly influential in determining a borrower’s credit score since it will typically account for a significant portion of credit utilization on a borrower’s credit profile. Credit bureaus track each individual credit account by itemized trade lines on a credit report. The aggregation of outstanding credit card debt from these trade lines is the borrower’s total credit card debt, which is used by credit bureaus to calculate their credit utilization ratio by dividing it by the aggregate amount of credit limits of all credit cards owned by the borrower. Credit card utilization is an essential component of a borrower’s credit score.
Debt Snowball
There’s no one perfect method for everyone when it comes to paying off debt. Let’s take a deeper dive into the advantages and disadvantages of using the debt snowball method to pay off credit card debt.
Pros and Cons of the Debt Snowball Method
Pros:
- The feeling of satisfaction when you pay off a card can provide the momentum to stick with the plan
- Provides a psychological boost as you see your debt eliminated card by card
- Each time you eliminate the need to make payment on one card, you’ll have more money to put towards the net card payment, creating a “snowball effect”
Cons:
- This method will take you longer than the debt avalanche method to pay down your debts
- It’s also more expensive than the debt avalanche since you’ll pay more in interest over time
When to use the snowball method to pay off your debts?
The snowball method is likely best for someone who needs encouragement to stick with their debt repayment plan and who finds it motivating to see their debt paid off the card by card.
Debt Avalanche
The debt avalanche may be the right fit for someone who is more disciplined and wants to pay off their debt via the fastest and least expensive route possible.
Pros and Cons of the Debt Avalanche Method
Pros:
- By paying off the card(s) with the highest interest rate first, you’ll save more money over time
- You’ll also decrease your debt faster since the interest fees will decrease as your debt decreases
Cons:
- It may take longer to see significant progress
- It might be harder to stay motivated
Debt Snowball vs. Debt Avalanche
It could be that your higher balance card also happens to be the one with the lower interest rate, to which we say, lucky you! In some cases, there might not be that much of a difference between the avalanche and snowball methods. Use our credit card repayment calculator to see if there is a big discrepancy between these payment strategies and decide which one is right for you.
If You’re Drowning in High-Interest Rates
If you’re committed to monthly payments but you’re overwhelmed by the amount of debt you’re facing, it may make sense to pursue other avenues for help if either the snowball or avalanche method isn’t enough.
Balance Transfer Credit Card
A balance transfer can help expedite paying off your debt by offering a promotional introductory 0% APR for a set amount of time, typically between six months to nearly two years. The way it works is you can transfer your high-interest debt to this card and continue making monthly payments. Since all of your payments will go solely towards the principal during the length of the offer, you’ll make faster headway than if you had to pay interest and principal.
One caveat is that these cards usually require a high credit score. If your credit isn’t great it might not be an available option. Also be aware that most balance transfer cards charge a balance transfer fee, which is typically between 3% to 5% of the amount being transferred and can add to your existing debt load.
Consolidate Credit Card Debt
Another option to help with your debt might be a debt consolidation loan. With this option, you can apply for an unsecured personal loan that’s repayable typically in three to seven years. These loans typically come with lower interest rates than credit cards and have fixed monthly repayment plans, otherwise known as installment plans.
Although a debt consolidation loan won’t immediately reduce the overall amount of debt you owe, it can help reduce the amount of interest you accumulate. If you qualify for a loan, it may also help boost your credit score since your overall credit utilization will be reduced too.
Credit Card Minimum Payments
Credit card minimum monthly payment formulas will vary from issuer to issuer but typically the minimum payment will be around 1% to 3% of the outstanding balance. Your credit card terms will say exactly how the minimum monthly payments are calculated. No matter what the exact number is, it’s low enough that the minimum payment on a $10,000 balance will only be a couple of hundred dollars.
An affordable minimum payment may make it more enticing to just pay the minimum balance each month. A March 2020 study by the National Federal for Credit Counseling® (NFCC) found that 62% of respondents had carried credit card debt in the 12 months prior to the survey. But this is an expensive habit that can lead to piling up the interest charges and turning a manageable balance into something of concern.
A $10,000 balance at 18% interest with a 3% minimum payment means a monthly minimum payment of $300. But just making a $300 minimum payment each month means it will take over 20 years to pay off the debt and you’ll have paid an additional $9,698.16 in interest.
Best Ways to Pay Off Credit Card Debt
Paying off your credit card debt is no easy feat for most. Other than paying off your debts all at once with one large lump sum payment, there are generally three ways to tackle a big balance:
- Debt consolidation. This is where you take out a new loan or credit card. Ideally at a lower rate of interest than what you’re currently paying. And transfer your other existing high-interest debts to the new loan. For some, paying just one bill a month is more appealing. And helps keep them on track than multiple bills at different times.
- Debt snowball. This method has you paying off the card with the smallest balance first. Then moving on to the next card with the smallest amount, and so on. Some find this way gives them the psychological boost they need to stick to their debt repayment plan.
- Debt avalanche. With this approach, you’ll make the biggest payments to the card that has the highest interest rate. This method may take you longer, but you’ll get out of debt paying less interest than the debt snowball method.
In Conclusion
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