Article covering our research published in the Journal of Consumer Research (and summarized at HBR).
This is generally a good sign for the economy, as it signifies that “consumers are spending more on big-ticket items, such as cars,” The Wall Street Journal reports.
However, on a personal level, taking on credit card debt that isn’t immediately paid off can be a sign of financial distress.
If you’re struggling to pay back your credit cards, there are typically two effective ways to tackle it: The snowball method, which targets the smallest debts first, and the avalanche method, which focuses on the highest interest rates.
Here’s a closer look at each:
Popularized by “The Total Money Makeover” author Dave Ramsey, the snowball method prioritizes your smallest debts first, regardless of interest rate. To try it, start by listing out all of your debts, smallest to largest. Pay the minimum balance on each one, except the smallest. For that one, dedicate as much cash as possible each month until it is repaid. Then move on to the second-smallest debt.
The idea is that you’ll gain momentum by watching debts disappear — as you would watching a snowball grow bigger and bigger — and that will motivate you to continue.
To employ the avalanche method, list your debts from highest to lowest by interest rate. Pay the minimum balance on each, but this time dedicate as much extra as you can each month to the one with the highest interest rate.
Mathematically speaking, tackling the highest interest rates first is the most efficient way to handle debt because it eliminates interest as quickly as possible. The debts that would be racking up the most in interest are dealt with first, so you can minimize interest paid.
However, researchers for the Harvard Business Review find the snowball method to be the most effective because you’re more likely to stay motivated if you can see your debts disappearing.
“Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress — and therefore their motivation to continue paying down their debts,” Remi Trudel, one of the researchers, writes for HBR.
At the end of the day, the most important thing is to choose a debt repayment method that works for you, and then stick to it.