Credit card debt is at an all-time high. American consumers carry a combined balance of $1.2 trillion, according to a recent report from theFederal Reserve Bank of New York.
A key reason balances keep growing may have less to do with spending and more to do with confusion: A recent survey from Experian found that 2 in 5 Americans in credit card debt believe making the minimum payment is enough to manage it.
It’s an easy assumption to make, says Melissa Lambarena, a senior writer on the credit cards team at NerdWallet. Because the minimum is the amount that’s printed on your statement, paying it can feel like the right thing to do.
However, “only paying the minimum will keep you in debt much longer,” she says.
The math backs her up. If you have an average credit card balance of around $6,600, a 20% interest rate and only make the minimum payment of 1% of the balance every month, you could stay in debt for 18 years, says Ted Rossman, senior industry analyst for credit cards at Bankrate.
“That minimum payment math is really brutal,” he says.
If you want to get out of debt, making more than the minimum payment every month isn’t optional. It’s essential, experts say. And the edge you can give yourself in managing your debt is to be strategic about it.
Experts generally recommend the “snowball” or “avalanche” methods for paying off credit card debt. One isn’t necessarily better than the other, Lambarena says. Rather, the right strategy for you is “the one that will make the most sense for you and keep you motivated throughout your debt payoff journey.”
Here’s a look at each one.
The snowball method
The snowball method encourages you to pay off your debts in order from smallest balance to largest balance. You make minimum payments on all of your debts, then devote any extra money to paying off the credit card with the smallest balance first.
Once that smallest credit card balance is paid off, you apply the money you would have used to continue to pay that card down to your next smallest debt. This creates a “snowball” effect that builds momentum with each credit card you pay off.
The advantage of this approach is the momentum you build as you pay down more and more debt, Rossman says. “Like a snowball rolling downhill, you’re gaining momentum, so you feel more motivated.”
The snowball method is best for people who need to see results to stay the course in their debt management journey, Rossman says. This method may make sense for you if you need “that carrot of motivation to feel like you’re actually making progress,” he says.
The avalanche method
The avalanche method focuses on debt with the highest interest rate first. After making minimum payments on all of your debts, apply any extra money toward the balance with the highest interest rate.
This method is mathematically more efficient because higher interest debts cost more to carry. Eliminating those first reduces your overall interest payments and shortens the time it takes to become debt-free.
Lambarena recommends the avalanche method — as long as you can stick to it. “Considering that interest rates are at an all-time high, this would be the most ideal strategy,” she says. “But the strategy means nothing if it’s not going to motivate you.”
Rod Griffin, senior director of public education and advocacy at Experian, agrees. “Progress with the avalanche method can seem very slow, especially in the beginning,” he says. However, “the avalanche method will result in the greatest financial advantage [for paying off debt] over time.”
No matter which approach you decide to take, experts say it’s important to make a plan and commit to it. There is no one-size-fits-all trick to paying off debt, but avoiding it won’t make it go away, Rossman says.
“Credit card debt is the highest cost debt for most households,” he says. “This is definitely one to prioritize for your financial wellbeing.”
