AA Credit Union

48 | | Winter 2016 T he average credit card holder has three and a half cards in his or her wallet. The cards likely have different interest rates, different credit limits and varied balances, especially after the holidays. Which card do you pay off fi rst? Two schools of thought exist: The fi rst says you should make payments on the smallest bal- ances fi rst, because seeing those fall down to zero will give you a confi dence boost to pay off the others. It is called the snowball method. Then there's the debt-stacking method, which involves putting the bulk of your efforts into the card with the highest interest rate, since it's costing you the most money. Want to see how each approach stacks up? We'll crunch some numbers for a consumer with four cards: 1. A Visa with a $5,000 balance at 28.9% 2. A MasterCard with a $700 balance at 24.9% 3. An American Express with a $2,000 balance at 11.9% 4. A Discover card with a $400 balance at 17% And you can afford to pay $300 a month total. $245 will go toward meeting your minimum payments, meaning you have $55 to throw toward aggressively paying off your balances. Option 1: The Snowball. By paying off the cards with the lowest balances fi rst while making minimum pay- ments on the others, you'll pay a total of $3,698.93 in interest charges. Jean Chatzky is the director of education and editor in chief of Savvy Money. She is a personal fi nance expert and best-selling author. She is a contributing editor for Men's Health and USA Weekend magazines and a columnist for The New York Daily News. Jean is the author of seven books, including her latest New York Times' bestseller Money 911 and her fi rst book for teens, Not Your Parents' Money Book. To get your own fi nancial checkup with SavvyMoney today, visit SavvyMoney.com/AACU. powered by Snowball vs. debt-stacking : Strategies for paying off credit cards SPOTLIGHT Option 2: Debt-stacking. By paying off the cards with the highest interest rates fi rst while making the minimum payments on the others, you'll be out $3,354.42 in interest charges — saving you nearly $350. You'll also get out of debt earlier. Of course, there are other considerations besides time and money. Morale, for one — if you feel that paying off a card in full will give you a kick in the pants, then by all means, knock out a low-balance card, then switch to the stacking method. The snowball approach also allows you to eliminate cards with annual fees, if you have them. And if you're looking to boost your credit score fast, paying off a card com- pletely, particularly if you're riding close to the limit, could do the trick. But remember that when you pay off a high-interest rate debt, the return on your money is equal to the interest rate you're pay- ing. So if you knock out that 28.9 percent card, you're put- ting a 28.9 percent guaran- teed return in your pocket. You can't beat that.

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