Snowball or stacking? How to pay off your credit card debt

One of the first steps to getting on track financially is to pay off your credit card debt, but just how to do that isn't always straightforward. We asked experts to weigh in on the different strategies for paying off credit card debt. Joe Raedle/Getty Images

TORONTO – Last week we talked to personal finance experts about the biggest money mistakes Canadians make. Ringing up consumer debt on credit cards and not paying them off in full topped the list of mistakes we make that could cripple us financially.

READ MORE: The biggest money mistakes Canadians make

The numbers are significant: for every dollar that Canadians earn, we owe $1.63 to credit card companies, banks and other lenders. The average family carries $20,759 in debt, without factoring mortgage debt.

One of the first steps to getting on track financially is to pay off your credit card debt, but just how to do that isn’t always straightforward. If you have multiple credit cards and multiple debts, where do you start?

We asked experts to weigh in on the different strategies for paying off credit card debt.

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Pay off the highest interest cards first

Debt “stacking” is an incredibly popular method of debt repayment. With this strategy you would pay off the balance of the debt with the highest interest rate first, paying only the minimum payment on your other debts. Once the highest interest rate debt is fully repaid, move on to the one with the next highest interest rate.

Experts at Consolidated Credit Counseling Services of Canada, a not-for-profit charity, say debt stacking is the best strategy because it makes the most of your money. By paying off your debts with the highest interest rate first, you minimize the overall amount you’ll pay in interest in the long run.

Say, for example, you have two credit cards, both owing $2,000. Card A has an interest rate of 11.99 per cent. Card B has an interest rate of 19.99 per cent. If you paid just the minimum payment of $50 per month on those cards, it would take you 158 months to pay off Card B, and you would have paid an additional $1,178.43 in interest. Meanwhile, it would take you 259 months to pay off Card A and you would have shelled out an additional $3,459.59 in interest.

“[Stacking] is a good option to get rid of those high-interest debts that result in the debt never really reducing,” said Laurie Campbell, CEO of Credit Canada Debt Solutions, a non-profit charity.
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Campbell stresses that for anyone using the stacking method, it’s important to not get frustrated and give up. “The downfall is that it may seem the debts take forever to pay off due to the fact that you will be paying them all for some time especially if the higher interest one is a high balance,” she said.

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Experts at Consolidated Credit agree the stacking method’s downfall is that it can be daunting. It takes a lot of discipline to slowly chip away at those high-interest debts.

Pay off the cards with the smallest balance first

The “snowball” method for debt repayment involves paying off the debt with the smallest balance first, paying just the minimum payment on everything else.

“The incentive here is that it is very easy to see progress by completely wiping out one credit card debt at a time,” said Campbell. Once you’ve paid off the card with the lowest balance, you can cut it up and move on to the next one.

“This method does make people feel like they are actually getting somewhere with their debts,” she said.

According to Consolidated Credit, the snowball method is also a good way to develop smart budgeting habits and build momentum as you pay off your debts one by one.

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The downside is that your debts with the highest interest rates might sit around for a while and you’ll continue to pay those high rates. “By paying only the minimum on the others, a lot of interest accumulates and the amount of interest paid on high debts,” agreed Campbell.

Get a consolidated loan

Campbell said getting a consolidated loan is a great option if you’re paying off multiple debts. With a consolidated loan, “you will have one payment at a much lower rate,” she said.

The unfortunate reality, however, Campbell said, is that consolidated loans can be difficult to obtain from a bank.

“Some people may be tempted to go to a high-interest lender to get a consolidation loan (such as a finance company). This is not a good idea as their interest rates on a consolidation loan could be well beyond 20 per cent,” said Campbell. A typical credit card in Canada comes with an interest rate of around 19.99 per cent (although store credit cards are often higher and you can find some low-rate cards). Because most credit card rates are actually lower than 20 per cent, going with a high-interest lender could actually put you further behind, Campbell said.

If you can secure a consolidated bank loan, cut up your credit cards, urged Campbell. “We have seen many cases where an individual has received a consolidation loan then began to use the credit cards again which puts them in a very bad financial situation,” she said.

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Regardless of what method you choose…

As popularized by financial author Dave Ramsey, “personal finances is 80 per cent behaviour and only 20 per cent knowledge,” meaning that the best method in the end is the one that works for you.

“Any strategy that goes beyond paying the minimum monthly payments is a step in the right direction,” said Jacob MacDonald from Consolidated Credit. The charity has a free online calculator that shows you how long it would take you to pay off your debt if you only paid the minimum balance on your cards. Credit Canada has a similar online debt calculator.

If you are struggling with paying off your debts on your own, Campbell recommends taking advantage of free counselling services, like the ones offered at Credit Canada. “People often are not comfortable talking to family or friends about their debt,” she said, adding seeking help from the charity is a great way to get advice confidentially.

What’s your favourite debt or personal finance tip? Share it in the comments below.


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