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Many people consider “debt stacking” and “debt snowballing” (the credit card debt payoff technique popularized by Dave Ramsey) to be the same thing. But there’s actually a subtle difference in the two techniques that, when you select the right plan for you, works in amazing psychological ways to help you pay off your credit card debt faster.
In this post about credit card debt pay-off plans, I explain the difference between debt stacking and debt snowballing and how to use them. In a nutshell:
1. When you select debt stacking, you focus on paying off your highest interest credit card debt first, while continuing to make minimum payments on the rest of your debt.
2. When you choose debt snowballing, you pay off your lowest balance credit cards first, while making the minimum payments on the rest of your cards.
Neither credit card debt payoff plan is “right” or “wrong.” It depends on:
- The quantity of debt you have
- How much money over the minimum payments you can put toward your credit card debt each month
- Your personal finance philosophies
- What motivates you
Debt Snowballing gets its name because you watch your credit card payment victories build and grow (like a snowball). Think about when you first start rolling a snowball to build a snowman. At first, it may feel like that little ball is going nowhere fast. But then you gain some momentum and soon, it takes less and less effort to see big results.
Debt snowballing works exceptionally well when you choose not to consolidate your credit card debt onto one lower interest credit card, and when you have a lot of smaller balances that just keep hanging on. Get rid of them quickly. Display your credit card statements that show zero balances in a prominent place where you pay your bills. Or keep an Excel document of your progress and look at it frequently.
When I had more than $10,000 in credit card debt, I did this and got a great boost from seeing PAID IN FULL in big, bold green letters every time I opened my Excel document and logged a bill payment. I remember hanging my first credit card statement that I paid off on my bulletin board (before I switched to electronic statements).
The free online personal budgeting software Mint.com, from Intuit, sends little notes of congratulations when you pay off a credit card, too, which is another psychological boost.
Common sense (and basic math) says that paying off your higher interest credit cards first will save you money in the long run. But, if your highest interest credit card will take you virtually years to pay off, you may become disheartened in the process.
Debt stacking works well if you meet any of these criteria:
- You are willing and able to do balance transfers or negotiate lower interest rates so that your highest interest credit card has a manageable balance that you can foresee paying off within six months to a year (or less).
- You have several credit cards with balances within a few hundred dollars of each other.
- You have the discipline to keep making payments even if it feels as if your debt is not dropping rapidly.
- You are extremely logical and right-brained and it would bother you to pay off lower interest credit cards as you watch your debt mount on a credit card with a 20% + APR.
- People who are more motivated to seek rewards or pleasure
- People who are more motivated to avoid pain
Self-help professionals and psychologists sometimes talk about two types of people:
We all have elements of both personalities in us, but one will typically be dominant. If it’s more important for you to “avoid pain” (i.e., high interest rates) you may do better with debt stacking. You’ll be determined to pay off that high balance, high interest credit card, because it will pain you emotionally to see the money you are throwing away on finance charges every month. (Mint.com also sends you notices when you were hit by a finance charge, so the service appeals to both personality types.)
If you’re motivated to seek rewards, then seeing those balances drop to zero on your lower balance credit cards will be greater incentive for you to stick to your budget.
Neither way is right or wrong… it all depends on the plan that works best for you to pay off your credit card debt.