The best way to manage your credit cards is to pay off every charge you make in a given month. In other words, you should only use your credit card if you have the cash to afford the purchase.
You’ve probably heard this advice before. But if you’re carrying a balance on your credit cards, you are far from alone.
There’s no point in beating yourself up if your credit card balances have crept up higher than you intended. Everyone makes mistakes. But it is important to acknowledge that the debt is costing you money and come up with a plan to improve your situation. The good news is there are several approaches you can use to eliminate your credit card debt.
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A Quick Look at the Numbers
Revolving credit card debt from month to month is expensive and can hurt your credit score by increasing your utilization rate. Yet it’s a common financial mistake that many people make (or, at least, have made at some time in the past).
Before we dive into credit card payoff strategies, here’s a look at a few key statistics to help you see how your debt compares to others.
- 48% of credit cardholders have carried a balance at least once in the past 12 months according to the Federal Reserve.
- A 2023 report by TransUnion shows that the average credit card balance is $5,733 per consumer—14.4% YoY growth compared to 2022.
- According to a 2023 Forbes Advisor poll, only 47% of cardholders don’t know their interest rate.
Strategy #1: The Debt Snowball
How the Debt Snowball Method Works
The debt snowball is a credit card payoff strategy that requires you to list your outstanding credit card balances in a particular order. At the top of your list of debts you’ll want to insert the account with the lowest balance. Next, you’ll order the remaining accounts from lowest to highest, according to the balances you owe.
Here’s an example of what the debt snowball looks like on paper.
Once you set the payoff order of your accounts, you’ll continue making at least the minimum payment on every credit card other than the one in the first payoff slot. (Paying the minimum payment helps you avoid credit card delinquency.) But you pay as much as you can toward the account with the lowest balance in an effort to pay it off first. Finally, after you pay off the smallest-balance card, move to the next account on your list, rinse and repeat..
What the Research Says
A number of financial and credit experts believe that paying off the smallest debt first is the best way for consumers to pay down their credit card debt. Here’s a look at some research that backs up this theory.
- A Boston School of Business study finds that the repayment strategy you choose can have an influence on how much money you apply toward debt elimination. Consumers in the study who paid off their accounts one by one paid down their debt 15% faster than those who made their debt payments in equal amounts. Conclusion: Small wins can keep you motivated.
- Experian provides an example of how the debt snowball method can save you money on interest. In the scenario, a consumer who has $59,000 in debt (including car loans and student loans as well as credit cards) could use the debt snowball approach to save approximately $4,300 in interest, even without making extra payments above the total amount due when he or she created the original debt payoff list. The secret is applying the extra money you free up when you pay off your first debt toward the next highest balance (and so on).
- myFICO points out that the debt snowball method might also help you lower the credit utilization rates on your individual credit card accounts faster than the debt avalanche. Why is this point meaningful? Anytime you lower the balance-to-limit ratio on a credit card (even an account with a small balance), there’s a chance your credit score might improve. And a higher credit score may save you money in ways that aren’t always immediately apparent.
Strategy #2: The Debt Avalanche
How the Debt Avalanche Method Works
The debt avalanche is another credit card payoff strategy that requires you to list your credit card balances in a particular order. With this approach, however, you base your debt payoff sequence according to your interest rate—highest to lowest.
Here’s a hypothetical example of a debt avalanche plan.
As with the debt snowball, you make the minimum payment on all of your accounts except for the credit card in the first payoff slot. (That’s the card with the highest APR with the debt avalanche approach.) Then, you pay as much as you can each month until you wipe out the balance on the highest-APR card first.
Once you pay off your highest-APR account, roll over the money you were paying on that debt each month and apply it toward your card with the second highest APR. Repeat this process until all of your accounts have a zero balance.
What the Research Says
If you look at your debt from a pure mathematical standpoint, the debt avalanche seems to be the best approach. Many financial experts agree with this assumption. Afterall, attacking your highest interest rates first should save you more money in most situations.
- A James Madison University study found that if someone has a goal of paying off their debt as quickly as possible, the debt avalanche is the ideal choice.
- The National Bureau of Economic Research also released a study which found that in the case of interest rates of 17% and above, study participants would pay less by following the conventional debt elimination—aka the debt avalanche.
However, there is a “but” that comes up in debt research. If the person trying to eliminate debt struggles with bad financial habits or lacks motivation, the debt snowball may actually be the superior debt payoff strategy.
- The National Bureau of Economic Research study above found that the psychological benefit of small victories with the debt snowball method might be powerful enough to trump slight variations in interest rates.
- A Kellogg School of Management study found that consumers who owe large credit card balances are more likely to eliminate all of their debt when they use the snowball method due to its psychological benefits.
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Strategy #3: Debt Consolidation
How Debt Consolidation Works
A third method you can use to pay down credit card debt is known as debt consolidation. Debt consolidation is the process of using a new loan or credit card to pay off the existing balances you owe. The goal with debt consolidation is to secure new financing with a lower interest rate so that you pay off your debt faster and save money.
The three primary types of debt consolidation are as follows:
With any type of debt consolidation, it’s important to make sure you stop overspending on your credit cards. If you pay off your cards with new financing, but run up a balance on the original accounts again, you could set yourself up for severe financial and credit problems later.
Also, if you plan to apply for new financing, it’s best if your credit score is either good or excellent. It is possible to qualify for debt consolidation financing with bad credit, but you might not be eligible for an interest rate that makes the process worth it.
What the Research Says
If you can avoid overspending, many financial experts acknowledge that debt consolidation could help you pay down your credit card debt faster. The research, on the other hand, is a bit of a mixed bag.
- A University of Michigan study found that debt consolidation can focus a consumer’s attention on what matters most—reducing his or her total debt as quickly as possible.
- The Boston School of Business study previously mentioned, however, found that unless you can secure an interest rate that’s considerably lower, combining debts can be disheartening and slow the debt elimination process because it takes away the motivation of small victories.
Which Credit Card Payoff Strategy Is Best for You?
Research aside, it’s important to note that every debt situation is different, and so is every debtor. You know yourself better than anyone else. So, you’re in the best position to decide which credit card payoff strategy is right for you.
If you’re having trouble deciding, here are a few questions you might want to ask yourself.
- What’s most important to you—saving the most money possible, or crossing individual debts off your list?
- Is your credit rating in decent shape, so that you’re likely to qualify for debt consolidation financing?
- Do you believe you could benefit mentally from eliminating little debts faster?
- Are you planning to apply for new financing in the near future? (If so, lowering your credit utilization ratio on multiple accounts via the debt snowball might boost your credit score faster than the debt avalanche approach.)
- Do you feel you have the discipline to stay motivated if you focus on the account with the highest interest rate first, even if it will take longer to pay off due to a larger balance?
Most of all, keep in mind that there’s really no such thing as a bad debt elimination strategy. As long as you’re chipping away at your high-interest credit card balances and you avoid new debt, you’re taking a step toward a stronger financial future.
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