One popular strategy for multiple credit card balance annihilation is the debt-snowball method — lining your debts up from smallest to largest and attacking the smallest balance first. The major benefit of this strategy is a mental one: it ensures that your first payoff day will arrive in the shortest amount of time because you will be annihilating the smallest balance first, which, in effect, will take the shortest amount of time to pay. But a possible disadvantage to the snowball method is that it does not always make the most financial sense. After all, the card with smallest balance is not always the card with the highest interest rate. And this is considerable because it’s not just the credit card balances that you are at war with, it is also the interest that is being charged on those cards.
Because I am personally on a quest to pay off my (8!) credit card balances ASAP, I set out to perform a side-by-side comparison of the two methods, the results of which I’ve included below. On one hand, I favor the idea of the debt-snowball because I believe that successful debt annihilation is extremely dependent on mindset, and the notion of achieving victory in a series of small, quick wins is definitely appealing. On the other hand, I realize that I will likely pay more in interest this way. Overall, my primary goal is to see exactly how much it will cost me to buy the mental victories provided by using the debt-snowball method.
In order to do this, I’ve used my programming experience and created a credit card calculator. Overall, I’ve considered three repayment scenarios:
Option A: Pay the Minimum
This option will cost the most and does not require a repayment strategy because there will be no overpayments.
Option B: MinLock
This option considers MinLock (a concept/term I made up for the purposes of this demonstration) as a repayment sum. MinLock is the sum of your current minimum payments locked in throughout the life of your debt. MinLock is a fixed sum that will ensure an accelerated repayment of credit card debt because, as your balances begin to decline, so will the minimum payments required from your card issuers. As a result, you will be free to overpay your leftover payment toward the account(s) of your choosing. For example, my minimum payments currently total $620.78, so I will always pay that amount toward credit debt even though my minimum payments will begin to shrink as I pay the balances down.
Option C: Overpay MinLock
This option is considers overpaying beyond the MinLock sum.
I was curious to see what I could save by employing this highest-interest method. The fact that I can save a few hundred dollars is considerable for me, as I am sure it would be for most people.
In any case, the calculator can accept different account input, and I invite you to run all your interest-accruing accounts through it. Comments/questions/suggestions are warmly welcomed.