Debt Stacking vs Snowball

When it comes to paying off an array of credit cards, there’s a bit of strategy involved. Taking the right approach could save you hundreds or even thousands of dollars in interest.

The average credit cardholder has three and a half cards in his or her wallet. They’re likely to have different interest rates, different credit limits and varied balances. Which card do you pay off first?

There are two schools of thought here – those who say you should focus your attention on the smallest balances first, because seeing those fall down to zero will give you a confidence boost to pay off the others. This is called the snowball method. Then there’s the debt stacking method, which involves putting the bulk of your efforts into the card with the highest interest rate, since it’s costing you the most money.

Want to see how each approach stacks up? We’ll run some numbers, assuming you’re average (we’ll round up to four cards). Let’s say you have:

  1. A Visa with a $5,000 balance at 28.9%
  2. A MasterCard with a $700 balance at 24.9%
  3. An American Express with a $2,000 balance at 11.9%
  4. And a Discover card with a $400 balance at 17%

And you can afford to pay $300 a month total. $245 will go toward meeting your minimum payments, which means you have $55 to throw toward aggressively paying off your balances.

Option 1: The Snowball. Pay off the cards with the lowest balances first while making minimum payments on the others.

PriorityBalanceMinimum Payment1st payment with this strategyTotal Interest PaidPaid Off In
Card #4 (17% APR)$400$15$15 + $55$20.806 months
Card #2 (24.9% APR)$700$20$20$150.0513 months
Card #3 (11.9% APR)$2,000$40$40$386.8126 months
Card #1 (28.9% APR)$5,000$170$170$3141.2737 months

With this method, you’ll pay a total of $3,698.93 in interest charges.

Option 2: Debt Stacking. Pay off the cards with the highest interest rates first, while making the minimum payments on the others.

PriorityBalanceMinimum Payment1st payment with this strategyTotal Interest PaidPaid Off In
Card #1 (28.9% APR)$5,000$170$170 + $55$2,283.0231 months
Card #2 (24.9% APR)$700$20$20$388.1632 months
Card #4 (17% APR)$400$15$15$105.7931 months
Card #3 (11.9% APR)$2,000$40$40$577.4536 months

With this method, you’ll be out $3,354.42 in interest charges – saving you nearly $350. You’ll also get out of debt earlier.

Of course, there are other considerations beyond time and money. Morale, for one – if you feel that paying off a card in full will give you a kick in the pants, then by all means, knock out a low-balance card, then switch to the stacking method. The snowball approach also allows you to eliminate cards with annual fees, if you have them, and if you’re looking to boost your credit score fast, paying off a card completely, particularly if you’re riding close to the limit, could do the trick. But remember that when you pay off a high-interest rate debt, the return on your money is equal to the interest rate you’re paying. So if you knock out that 28.9% card, you’re putting a 28.9% guaranteed return in your pocket. You can’t beat that.

Jean Chatzky