Two best methods to pay off credit cards

There are two proven methods for reducing credit card debt spread out over multiple accounts effectively. The best one to use depends on your budget and available cash flow:

  1. High APR debt reduction plan – the roll down method. This is the most cost effective method because you reduce your debts in order of APR, starting with the highest APR first. This helps minimize total interest charges.
  2. Low balance debt reduction plan – the roll up method. This method helps you build momentum if you’re starting with limited cash flow. You eliminate the debts with the lowest balances first.

How debt reduction works

No matter which reduction plan you choose, both work in largely the same way; the two options just differ by the way you order the debts for elimination.

  1. First you streamline your budget to maximize cash flow available for debt elimination.
  2. You make the minimum required payments on all of your credit cards except one.
  3. All of your extra cash flow goes to making a larger payment on the one debt until it’s eliminated in full.
  4. Then you move on to the next debt and the next until each debt has been eliminated and you’ve zeroed out all of your account balances.

How long does debt reduction take?

The timeline for a debt reduction plan varies based on how much you owe in total and how much cash flow you have available. However, experts recommend that you should be able to eliminate your debt within 5 years or less in order for a debt reduction plan to be effective.

Use a credit card debt repayment calculator to help map out a strategy and see how long it will take. If you can’t develop a plan that eliminates your debt in full within five years, then you may be better off looking for another solution.

Comparing the benefits and challenges of each plan.

The right time to roll down

The primary benefit of roll down is that you eliminate the debts with the highest interest rates first. These debts cost more with each billing cycle, so reducing them first is the most cost effective way to pay off your credit cards.

The challenge is that your highest interest rate debts may also be your largest balances. This happens if you’ve run up balances on reward credit cards earning points, miles or cash back OR you’ve missed payments on your highest balances and penalty APR has been applied.

In this case, if you have limited cash flow, it may take a long time to eliminate these high APR debts in full. You basically won’t have enough cash flow to make progress quickly, which reduces the effectiveness of this strategy.

When it’s better to roll up

The roll up method is designed to overcome lack of cash flow on a limited budget. It takes advantage of the fact that once you eliminate a credit card debt, that money is freed up so you can put it towards other obligations.

You eliminate your debts in order of the lowest balances so you can build up momentum to tackle your largest debts. It’s like a snowball rolling down the hill, rolling up more and more weight as it moves forward.