Pay Off Debt with Debt Stacking
Paying Off Debt July 12th, 2007If you have multiple credit cards and a lot of debt, debt stacking is the best method to maximize your payments to the credit cards. I was once in $12,000 worth of credit card debt, and used this method to pay the balance off in less than 2 years. Simply put, the system uses the principle of attacking the highest interest rate credit card first, while only making minimum payments to the other cards. Let’s look at an example:
- Credit Card 1: $5,000 at 12% APR, minimum payment $100
- Credit Card 2: $5,000 at 18% APR, minimum payment $100
- You are able to pay $300/month towards all credit cards
Spreading the Payments evenly ($150/month to each credit card):
By spreading the payments evenly, Credit Card 1 would be paid off in approximately 3 years and 5 months. Credit Card 2 would not yet be paid off. After paying off Credit Card 1, if you applied the $150 left over to Credit Card 2 (thereby increasing the monthly payment to $300) you would finish paying off Credit Card 2 about 7 months later. This makes a grand total of 4 years to pay off both cards.
Using the Debt Stacking Method:
With the debt stacking method, you would apply the maximum amount possible to the highest interest rate credit card. Therefore, you would pay $200/month to Credit Card 2, while only making the minimum payment of $100/month to Credit Card 1. It would take approximately 2 years and 8 months to pay off Credit Card 2. If you applied the left over $200/month to Credit Card 1 (thereby increasing the monthly payment to $300) it would take and additional 12 months to finish paying off Credit Card 1. This is a grand total of 3 years and 8 months to finish paying off both cards.
This is the power of compound interest. Using the debt stacking method instead of spreading the payments evenly, you would have paid off these credit cards 4 months earlier. And based on making $300/month payments, you would have saved $1,200 with the same total monthly payment!!!
So if you find yourself in a situation with multiple credit cards and varying interest rates, think of the total payment you can make towards credit card debt every month, and then make minimum payments on all the credit cards with lower interest rates, while paying the maximum amount possible to the highest interest rate card. You’ll be debt free much faster, and you will save a lot of money!
Internal Tags: Paying Off Debt
Bookmark, Share or Email this article.
Related Posts:
|
||
Like this article? Subscribe to my RSS feed.
September 6th, 2007 at 6:11 pm
[…] to the other cards, and subtracting that from the amount available to pay (refer to my article on debt stacking for further details). Hopefully, you will see a nice small number of months left to pay for the […]
March 12th, 2008 at 6:33 pm
I think the credit card stacking is awesome, I have heard of it before but I always wonder if I should pay on my credit cards or more mortgage principal. I have 3 credit cards totaling $16400 with interest rates of 0% to 6.99%. I pay a little over $300 a month minimum. I have a 2nd mortgage of $43,000 with an 8.9% fixed rate for 15 yrs than it will balloon. If I paid an additional $91 a month on it, it would be paid in 15 yrs. Would you recommend putting the extra towards the 2nd or stack with the credit cards?
March 13th, 2008 at 1:00 pm
This is a tough call. On the one hand, it makes the most sense to pay down the highest rate debt first, then move on to lower interest rate loans. However, in this case, I think I would work on paying down the cards using the debt stacking method. The reason for this is that you can conceivably finish paying off your credit cards in the next two years, whereas your 2nd mortgage is going to take far more time. So I would use the debt stacking method on the credit cards first, get the sigh of relief, then use the extra money to pay off the 2nd mortgage, if you wish. My view of mortgages is that they are long term debt, most people aren’t able to pay them off in under 5 years, and you get the benefit of writing off the interest on your taxes, so it seems to make more sense to focus on credit cards first. Also, typically credit card interest is much higher, I am surprised that your rates are lower than your 2nd mortgage rate. You may want to look at refinancing that 2nd mortgage or, check out A Home Refinancing Tip You May Not Know for another option.
March 26th, 2008 at 3:45 pm
[…] for disaster. Be smart, hunker down, and pay off those cards as quickly as possible. You can use my Pay off Debt with Debt Stacking method to maximize your payments over your […]