If you have multiple credit cards and a lot of debt, debt stacking is the best method to maximize your payments to the credit cards. I was once in $12,000 worth of credit card debt, and used this method to pay the balance off in less than 2 years. Simply put, the system uses the principle of attacking the highest interest rate credit card first, while only making minimum payments to the other cards. Let’s look at an example:
- Credit Card 1: $5,000 at 12% APR, minimum payment $100
- Credit Card 2: $5,000 at 18% APR, minimum payment $100
- You are able to pay $300/month towards all credit cards
Spreading the Payments evenly ($150/month to each credit card):
By spreading the payments evenly, Credit Card 1 would be paid off in approximately 3 years and 5 months. Credit Card 2 would not yet be paid off. After paying off Credit Card 1, if you applied the $150 left over to Credit Card 2 (thereby increasing the monthly payment to $300) you would finish paying off Credit Card 2 about 7 months later. This makes a grand total of 4 years to pay off both cards.
Using the Debt Stacking Method:
With the debt stacking method, you would apply the maximum amount possible to the highest interest rate credit card. Therefore, you would pay $200/month to Credit Card 2, while only making the minimum payment of $100/month to Credit Card 1. It would take approximately 2 years and 8 months to pay off Credit Card 2. If you applied the left over $200/month to Credit Card 1 (thereby increasing the monthly payment to $300) it would take and additional 12 months to finish paying off Credit Card 1. This is a grand total of 3 years and 8 months to finish paying off both cards.
This is the power of compound interest. Using the debt stacking method instead of spreading the payments evenly, you would have paid off these credit cards 4 months earlier. And based on making $300/month payments, you would have saved $1,200 with the same total monthly payment!!!
So if you find yourself in a situation with multiple credit cards and varying interest rates, think of the total payment you can make towards credit card debt every month, and then make minimum payments on all the credit cards with lower interest rates, while paying the maximum amount possible to the highest interest rate card. You’ll be debt free much faster, and you will save a lot of money!