There are four main methods for paying off credit card debt: Avalanche, snowball, debt consolidation, and balance transfer. Each method has its pros and cons. Here are the basics of each technique to help you decide which is best.
Avalanche method
The debt avalanche method prioritizes paying off high-interest debt first. Each month, you’ll make the minimum payment on all debts but make a larger payment on the one with the highest APR (annual percentage rate). Once the high-interest card has a zero balance, take the money you used to pay it down and put it toward the next highest-interest credit card.
For example, if you have three credit cards with 20%, 18%, and 15% interest rates, you’ll first make additional payments on the 20% one. Once that’s paid off, you’ll focus on paying off the 18% card and then the 15% card.
Using this method, you’ll pay less interest overall. That means more money in your pocket when you’ve paid off your debt.
Snowball method
While the avalanche method focuses on paying off high-interest debt, the snowball method focuses on low-balance debt. You’ll pay extra toward the credit card with the lowest balance first and the highest balance last.
Similarly to the avalanche method, you’ll still make minimum payments on all accounts to avoid fees. You’ll just put any extra toward that low-balance card first.
For example, if you have three credit cards with balances of $5,000, $3,000, and $1,500, you’ll pay off the $1,500 balance first. After that’s taken care of, you’ll put that extra money toward the card with the $3,000 balance and then the $5,000 balance.
The snowball method lets you make quick progress on low-balance debts, which can keep you motivated. However, you may end up paying more interest overall.
Debt consolidation
Credit card interest rates can be notoriously high, which can make it hard to get out of debt. A debt consolidation loan can help you pay off the debt quicker, possibly with a lower interest rate.
When you take out a debt consolidation loan, you’ll pay off all credit card balances using the funds. You’ll then have one monthly payment instead of several. Ideally, the loan will have a lower interest rate than the credit cards, which helps you pay less interest overall.
Like all loans, you’ll have to qualify for a debt consolidation loan. Many lenders require a minimum credit score in the mid-600-range. If your score is lower, you may still qualify for a debt consolidation loan, but the interest rate will likely be higher.
Debt consolidation loans simplify the process of paying off credit card debt but may not be an option if your credit score is poor.
Balance transfer credit card
Another way to pay down debt is to apply for a balance transfer credit card. You’ll transfer the balances from your existing cards, so you only have one payment to make each month.
Balance transfer credit cards often have a 0% introductory interest rate, allowing you to pay off your debt interest-free. You may need to transfer the balance within a specific time frame to take advantage of the offer.
Once the introductory period is up, the interest rate will increase, so it’s in your best interest to pay it off as quickly as possible. Making higher payments to reduce the balance quickly can be motivating for some borrowers and stressful for others.
You may find that the card limit isn’t high enough to move all your debt over. That means you could still end up with multiple cards to pay off. Additionally, if the balance is too close to the card’s limit, it could negatively impact your credit score.
