American debt is climbing again, especially credit card debt, according to NerdWallet. On average, U.S. households had $16,883 in credit card debt halfway through 2017, up 2.64 percent from the previous quarter. That’s a heavy load — both in terms of interest paid and stress.
While people have a hard time dealing with debt, they also have a hard time talking about it. A poll by CreditCards.com found that Americans would rather discuss their salary, weight, politics or religion with a stranger. They found the only topic of discussion rivaling “the amount of your credit card debt” as a taboo topic was “details of your love life,” with only 15 percent likely to reveal their Visa balance even fewer than the 16 percent willing to share romantic details.
And if people can’t talk about debt, maybe that’s why research shows most of us take the wrong approach to paying it back.
There are a couple of approaches that can work. One is more cost-effective, as we’ll explain, but both approaches require one common element: motivation. If you aren’t going to make consistently paying down debt a priority, you lose out regardless of strategy. So while there is a clear, mathematically correct approach to dealing with debt, it’s important to do what works best for you.
Option 1. Prioritizing high-interest accounts
In this model, you make just the minimum payment on every debt except the one with the highest interest rate, which is the one costing you the most money over time. For that debt, you throw whatever amount you can regularly afford beyond the minimum at that debt until it’s paid off.
Once that debt’s gone, your debt-paying budget stays the same — you just shift the biggest payment to the debt with the next-highest interest rate, paying minimums on the rest, until that one is paid off. Then you go on down the line like that, knocking off each subsequent top debt one at a time.
The obvious advantage to this model is you save the most money possible over the long term. The downside: Progress may appear to be slower than it actually is. Having a large number of debts may feel more stressful even though you’re paying down the debts in the most effective way to eliminate them.
Option 2. Paying off low balances first
As with the first model, you pay the minimum on all but one debt and “snowball” the payments from one debt to the next as they disappear. The difference here is that you focus on the smallest debts, allowing you to knock accounts off the list faster.
The advantage? Having fewer accounts to juggle feels good. It’s a result we can easily see: Balances shifting downward is not as impressive or obvious as a big zero. Some people need to see that kind of accomplishment to stay motivated. Unfortunately, this means you’re actually making slower progress on your overall debt because those big-interest accounts are still accruing as you pay off the smaller balances.
Research out of Texas A&M University indicated that paying off low balances first (“small victories”) may help build motivation, although the subject needs more study, the researchers say.
“[I]ndividuals increase their performance in tedious tasks when those tasks are broken down and put in ascending rather than descending order,” they write.
Is all this hard to visualize? Imagine it this way: You’re trying to bail out your sinking ship, but a bunch of creditors are standing behind you with little kiddie beach pails, pouring more water in. While it may feel good to turn and shove those guys off your boat right away, there’s a jerk with a huge bucket standing — and grinning — at the other end of the ship. You really ought to run and tackle him first.
What’s best for you?
The fact is, the bucket sizes are different for everybody. We all have different situations, with a number of debts of varying sizes and interest rates, and with different income levels. Fortunately, there’s a much more concrete way to figure out how to handle debt that works for everybody. Being able to plug your specific numbers in and see how much money you lose by flipping between the two methods can help decide.
Need debt help? Check out a step-by-step guide to debt strategy, or how to find free or low-cost nonprofit credit counseling. Or pursue debt management services: Money Talks News partner Debt.com can match you with a trustworthy debt management service for a fee. Another option: Check out “Life or Debt,” a book by Money Talks News founder Stacy Johnson ($5-$10 on Amazon) that’s helped hundreds of people. Taking concrete steps to get out from under your debt burden will be a relief.
Marilyn Lewis contributed to this post.