Credit card is a great addition to your wallet, but only when you responsibly manage all your credit card accounts. Spending more than what you can afford to pay back can pull you into a debt trap and drop your credit score. And when you are stuck in a huge credit card debt, coming out of it can be quite a struggle making credit card payment a nightmare for you.
Manisha, a 26 year old marketing executive, suffered from a similar problem when she messed up her HDFC credit card bill payment by paying only the minimum amount for the last one year on her two credit cards. And now she is under a credit card debt of more than ₹2 Lakhs.
When it comes to credit card payment, people will give thousands of advice some of which may be completely opposite of the other and you end up more confused than before. You should know that the decision is fairly personal and depends on your financial situation. However, you would be surprised to know that there have been academic researches on this subject to guide you on how you should pay back your credit card debt.
There are two main methods- The Snowball Method and the Avalanche Method.
The Snowball Method
This was popularized by businessman and author Dave Ramsey. Under this, the first step would be to pay the minimum amount due on all your credit cards. After this, you should dedicate any leftover amount towards the credit card that has the lowest balance. Continue paying the lowest credit card debt until it is paid off and then move on to the next smallest debt.
You will pay off a small amount in the beginning but since the total amount due is also lesser, it will be paid off within a few months. And by the time you are ready to pay the largest debt, you will be in a position to dedicate significant amounts to it unless you start ringing up new bills on other credit cards. However, a major flaw in this method of credit card payment is that it does not consider the interest charges you have been paying on your debts.
Suggested Read: Ways to Deal with Piled up Credit Card Debts
The Avalanche Method
The first step in this method is similar to the snowball method wherein you will pay the minimum amount due on all your credit cards. However, instead of targeting the lowest balance card first, in this method you have to pay the one that charges you the highest APR. Once you have paid off the one with highest rate of interest, you can move on to the next card while making the minimum payment per month regularly.
Let us understand this with the help of an example.
Suppose you have three credit cards- SBI Card PRIME, JetPrivilege HDFC Bank Diners Club and Indianoil Citi® Platinum Credit Card. You have dedicated ₹25,000 per month for credit card bill payment.
| Credit Cards | Total Amount Due | Minimum Amount Due | Rate of Interest (APR) |
| SBI Card PRIME | ₹72,000 | ₹8,300 | 40% |
| Indianoil Citi® Platinum Credit Card | ₹35,000 | ₹2,700 | 39% |
| Intermiles HDFC Bank Diners Club | ₹53,000 | ₹4,400 | 23.88% |
In both the credit card payment methods, you first have to pay off the minimum amount due which adds up to ₹15,400. Now, you still have ₹9,600 which you can utilize towards making your credit card bill payment.
Under the Snowball Method, you will dedicate that amount to pay off your Citi Bank credit card debt. Once that is taken care of you can move to HDFC and finally the SBI card. Here, you should keep in mind that when you only pay off minimum balance initially, HDFC and SBI will keep incurring interest on the total outstanding amount which will keep adding on to the total debt balance.
If you pay using the Avalanche Method, you will first use the extra ₹9,600 to make SBI credit card payment as it charges the highest APR of 40%. Although the difference would not be quite visible in the initial stages but you will save more on overall interest pay out. After you have paid off the SBI Card debt, you can move on to Citi Bank credit card and HDFC credit card payment should be touched at last as it charges the lowest interest rate of 23.88%.
An important point to note here is that these two methods do not apply only to credit cards but to all kinds of debt. When you have a number of loans like education loan, personal loan, car loan, etc. along with credit cards, it makes more sense to choose the avalanche method as there may be drastic difference between the rates of interests on other pending debts. You would want to get rid of costly debts first so that you can save more on interest outgo.
| Debt Snowball Method | Debt Avalanche Method |
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So how to choose what’s the best for you?
A lot of research has been done on the two methods of debt payment and it turns out that paying off smaller chunks is good to keep you motivated. While avalanche method may be more rational, a lot of people would prefer something that encourages them to stick to the plan. There is no hard and fast rule as to what you should choose. Nevertheless, if you still stand confused about which debt payment method is better, the following points will help you decide-
1- Know Your Debts- To choose the right method, doing the math is extremely important. Calculate all your debts and remind yourself of the number every now and then. Although managing personal finance is completely a personal choice, digging deep into the numbers will help you make a choice that has more practical value. For example, in case of credit cards the interest rates on different cards will be more or less the same so the difference would not be huge. Snowball method is good for paying off your piled up credit card dues. Switch to bite-sized payoffs and stick to the plan.
2- Tackle One Account at a Time- When you try to manage all your accounts simultaneously, chances are high that it will turn into a mess. When you focus on one credit card payment at a time, the contribution you make towards this debt will also be higher, thus resulting in a visible difference. This, in turn, motivates you to stay on track with your financial plan.
3- Stay Motivated- It is easy for your motivation to flag. If that happens, try putting some extra amount into your smallest outstanding balance to make the effect more visible. If you are only short of a few thousand rupees, it is better to pay it off at once and get rid of it. This will work as a major motivation booster for you.
4- Try to Make a Rational Choice- As mentioned above, the debt avalanche method can help you save a few thousands more as the total interest outgo would be reduced significantly. If you look forward to a more rational approach and feel that you can stick to the plan, debt avalanche is good.
It is needless to say that paying off debts is not all about selecting the right payment approach. It involves a lot more financial planning, budgeting and you may also need to bring a few changes in your lifestyle if you really wish to stay afloat and not sink in endless ocean of debts. Go for a comprehensive planning, think about your expenses, stay prepared for emergencies and then start with your approach.
Suggested Read: Is your credit card getting maxed-out regularly?
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I spent a lot of time to find something similar to this