How to pay off multiple credit cards – the snowball effect

If you have multiple credit cards – and there are twice as many cards on issue as there are people in Australia – it would seem to make sense to tackle the one with the highest interest rate first if you’re keen to get your debt under control.

Yes, you could save more interest by clearing the most expensive card first. But another strategy – the snowball method – involves targeting the card with the smallest debt first, regardless of interest rate. Why? Because of the psychological impact of managing to clear a card debt.

Think of it like dieting: It’s easy to become disheartened if you look at the 20 kilograms you have to lose and how long that’s likely to take; break it down into smaller goals and you’re more likely to eventually achieve the loss you desire.

Here’s how the snowball method works:

Start by listing all your credit card balances from smallest to biggest. If two of the balances are similar, list the debt with the higher interest rate first.

From now on, you’ll pay the “minimum required payment” on every card.

But in addition you’ll make extra payments against the smallest debt – diverting as much as you can possibly spare.

By paying extra, you’ll eventually clear the debt on this first card. Now you can tackle the next card on your list.

This is when the snowball effect starts to occur. Take the money you no longer need for the minimum repayment on the card you’ve just cleared, along with the extra funds you were diverting to it, and add it to the minimum repayment you were making on the second card on your list.

Now you have even more money to put towards clearing this next card.

Repeat until you’ve paid off all your cards.

Of course, the final step as you clear an outstanding balance should be to cancel the account and cut up the credit card.

If you really need the convenience of plastic, switch to a debit card where you use your own money. It’s amazing how much easier it is to be disciplined with your spending when you know it’s actually coming out of your hard-earned cash, and that the tap turns off when you’ve spent the lot.