If you have multiple credit card debt, the most efficient way to pay it off is one card at a time. There are two common ways, the traditional way and the Dave Ramsey way.
With both methods you shovel as much money as possible each month to a single credit card, and pay the minimum on all your other credit cards. With the traditional method of snowballing your credit card debt, you would pay down the card with the highest interest rate first. This way you are cutting down the most expensive debt you have first. From a purely financial standpoint, this method makes the most sense and it's the one I personally prefer.
However, Dave Ramsey, writer of The Total Money Makeover, advocates for paying down the card with the least amount of debt, irregardless of the interest rates. The idea behind this is that credit card debt is an emotional trauma of sorts, and if a person can see results quickly they are more apt to stay with the plan. His argument is that if you stay with the plan, despite it being the financially more expensive way to eliminate debt, it's not as expensive as quitting after a few months. Oftentimes the card with the highest interest rate has the highest debt. If a person is sending most of their money to this card, they will not be emotionally rewarded by seeing it go down quickly, and thus will become easily discouraged and fall back on paying the minimum on all the cards.
You need to figure out what plan will make you stick like superglue to your goals, the highest interest rate or the lowest amount owed.
It's important to keep track of your debt. Writing down what you owe on each card on a sheet of paper gives you a snapshot of your overall debt and a map to eliminate it. It is also the first step to regaining control of your finances.
- 1. Write down each credit card you have, the amount owed, and the interest rate.
- 2. Put the cards in descending order with highest interest rate first OR in ascending order with the least amount owed first.
- 3. Make minimum payments on ALL the cards EXCEPT for the card in the number one spot- funnel the most money to this card!
- 4. Repeat the list every month, and watch with glee as you burn through those payments and out of debtor's hell.
Of course, you could also snowball your debt with Poorer Than You's Alternate Debt Snowball Theory, and simply paydown the most nails-on-a-chalkboard irritating mother of a debt first, and work your way down there. Again, the most important thing is that you pick a plan you will want to stick with AND you alter your spending habits so that you don't crank out your cards to the max again. Money and finances involve a lot of emotion, and perhaps nothing could be more emotional than that itty bit of plastic that haunts your dreams. You're being hung out to dry by both your own actions as well as by those of the credit card industry itself.
Hopefully this week I will start a series of posts on credit card debt. Perhaps it will be a bawling mini-series like The Thorn Birds. One can only hope. In the meantime- Play with a snowball! Use this great Snowball Calculator, watch the eye-opening The Secret History of the Credit Card ,and start to melt the fat in your wallet.