It was in 2017 that I started to document my budget and my efforts to get out of credit card debt, as well as realizing the amount owed on my student loans. It seemed more realistic to tackle the credit card debt first compared to my student loans. With a better paying job I thought I could at least pay off the debt faster than before but I also realized I how much more I would have to pay to make a dent in the debt that ballooned due to interest rates. I had more confidence in myself that I could manage to pay off the debts faster using the snowball method. Quick breakdown of the 2 most commonly used debt payoff methods.
The Snowball Method is paying off the lowest debt, regardless of the interest rate, and then making your way to paying off your highest debt. For example, a person has one credit card which has a $3,000 dollar balance with an interest rate, or APR, of 20% and $20,000 dollars in student loan debt with an interest rate of 5%. Using the Snowball Method, the person would tackle the smallest debt of the credit card balance first and when that is paid moves toward paying off the student loans. This method of paying off debt is not preferred by financial gurus (I'll discuss this further later) but has proven to help individuals getting out debt to stick with their payoff plan because of the psychology of small wins that maintain motivation and focus. This approach of paying off the smallest debt no matter the interest can be costly even though it feels more approachable.
The Avalanche Method is the preferred way to tackle debt by some financial gurus, like David Ramsey, because the individual pays the debt with the highest interest rate regardless of the debt balance. Paying the highest interest rate is important in maximizing the disposable income used to get out of debt. Interest rates are not typically accounted for (I didn't factor appropriately) when paying debts off. High interests can add additional time to paying off debts by years in most debt payoff cases. Let's say a person trying to payoff debt has no student loan debts. Yippee! The objective is to pay off 2 credit cards, 1 with a balance of $1,000 dollars at APR of 18% and 1 with a balance of $3,000 dollars with an APR of 24%, and 1 personal loan with a balance of $5,000 with interest rate of 9%. Using the avalanche method, the first debt to start paying off would be credit card #2 of $3,000 dollars because the APR 24% is the highest interest among the other debts. Once that credit card is paid the next debt would be credit card #1 of $1,000 dollars with its APR of 18% and lastly the personal loan of $5,000 dollars with an interest rate of 9%. This on paper may seem doable but we are humans and humans don't stick to typical behavior patterns for long. The motivator for sticking to this type of approach would be knowing the money saved from paying on the interest especially when there is a finite amount of disposable income to be used on debt repayment.
Hot Seat Time! In 2017, among my personal debt were 2 credit cards (plus other like student loans). As of 10/16/2017, Credit Card #1 (my oldest line of credit) had a balance of $2,835.36 and an APR of 16% and Credit Card #2 had a balance of $1,731.81 with an APR of 18%. When I was tackling my debt, I didn't take into account the interest rates that much but understood that I would have to increase my minimum payment from $75 dollars if I wanted to pay it off within the next 4-5 years.
In 2017, I made roughly $35,000 from my first big girl job which if you remember my total take home pay was roughly $951 dollars bi-weekly. I had, if I felt able, was about $140 dollars to pay on both credit cards each month. This will lay out 3 options. Option #1, I could pay both credit cards $70 dollars per month which would be above the minimum payment and would make progress on both but would be hard to see because of the mounting interest accrued. Option #2, I could use the Snowball Method to pay the smallest debt of Credit Card #2 with a balance of $1,731.81. And had Option #3 of using the Avalanche Method of paying Credit Card #2 (balance of $1,731.81) with an APR of 18%.
If you noticed a pattern you are not wrong. The clearest course of action was to tackle Credit Card #2. It made sense for me to handle this because it was the smallest debt but it also made sense too because the APR was 18% which was high compared to Credit Card #1. So I did. I paid $75 dollars per month on Credit Card #2 and paid $55 dollars on Credit Card #1. This is not a textbook example of the Avalanche or Snowball Method but it was what I chose for myself at the time. If I would have paid $100 dollars per month it would have taken me 1 year and 9 months with $288.50 paid in interest compared to the 2 years and 5 months with $410.00 dollars paid in interest!
Takeaway #1: There is no right/wrong method to payoff debt. Just START!
I was feeling so much shame around having debt and feeling stuck that just needed to make a move and continue on. Finance media has mixed messages and rightfully so because Personal Finance is personal. It is individualized for what works for me, you, and anyone who is trying to get a handle on their debts. Give yourself permission to try either method and not be afraid to change as needed. Plans will change and require grace to adjust based on your individual needs.
Takeaway #2: Know your debts, Inside and Out.
Hindsight is always 20/20. I wish I took in account my interest rates on my credit cards coupled with the varying payments that would show the payoff timeline. Don't be like me fumbling in the dark thinking, hoping, and praying that $100, $125, or whatever amount will bring you closer to paying off debt. Know your numbers! There are several Credit Card Calculators online (Thank you Google). I used this one https://www.calculator.net/credit-card-calculator.html whatever you use make it customized to where you are in your journey.
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