Should you EVER pay the high interest debts first in a debt snowball?
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Credit card interest is one of the things that is most widely criticized when people talk about the Debt Snowball method of debt repayment. It makes people crazy and they insist that paying the higher interest first is the only ‘right’ way to do it. So do they have a point? Well, yes! And also, no…(more on this later!)
When I decided that I would use the Debt Snowball method to get debt free, it did strike me that it might be a good idea to find out how much interest I was actually paying. Why didn’t I already know? Well…..
It’s a pretty crazy statistic that in the UK, each home now owes an average of £15,385 not including any mortgage debt. It’s quite shocking isn’t it. Just under £3,000 of that is owed to credit card companies, but since statistics talk in averages, most people who owe money on credit cards actually owe a lot more than that. We did, although at the time I’d never have admitted that :)
What DIDN’T come as such a shock to me was that nearly a THIRD of UK credit card users have no idea how much interest their credit card company is charging them. This same third only pay the minimum repayment on their credit card/s every month and I can totally understand this, as this was me for quite a number of years. Why didn’t I know how much credit card interest I was paying? Well…..the cold hard fact of it was that it really didn’t make any difference to me at all. WHAT…..?
The short back story is that it wasn’t totally our fault (honestly!) that we got so into debt, but what was our fault was handling it terribly and not facing up to how bad things had become way sooner than we did. We (me?) tried to plough on through, always looking to replace one line of credit with another and one consolidation loan with another consolidation loan. Did it work? It totally did not. It just got worse. Don’t believe that if you’re able to make the monthly repayments, things must be fine…it’s a slippery slope!
Anyway, my point is that while it might seem shocking to not know the interest rate on your credit card, many people don’t have the luxury of a choice. They believe they don’t have the option of saying yes or no to a high interest rate anyway, but when I made the decision to live debt free, I made it my business to find out exactly what I was paying.
How to work out the interest you pay on your credit card (with calculator)
It’s a pretty straight forward question isn’t it?
Out of my minimum payment this month, how much of it is interest?
The answer to this question was surprisingly hard to find out. My credit card company gave me ‘examples’ and not an exact figure, saying it ‘varied’ and depended on this and that and the other. I tried to work it out but was never sure I’d got it right. Now, all this time later, I honestly believe these companies prefer it if you don’t know. It’s so outrageously shocking, that given a choice (which I know some aren’t!) I just cannot imagine as many people would willingly sign up for them as currently do.
See how much of your minimum payment this month is actually interest!
Find out what the interest is on this
months minimum credit card repayment
So, is it crazy to leave higher interest rates till later in a Debt Snowball?
Again, yes and no. And here’s why, and what you can do.
I cannot tell you enough that it’s SO worth checking to see if you can switch your credit cards to a 0% deal if you possibly can, and it’s right for you. This could mean the whole of your monthly payment will go towards reducing your balance rather than what’s left after you’ve paid the interest. BUT, and this is a big but….you need to make sure it’s worth it. 0% credit card deals are NOT generally ‘free’ and you’ll be charged a % of the balance you transfer, so the higher your balance, the bigger the fee. That’s how the credit card company make their money, since you’re not paying interest!
Grab a piece of paper and see it if makes sense to you. Look at how far along your debt snowball your credit card with the interest is. If it’s going to take next to no time to get to, it might not be worth paying the balance percentage costs, as you’ll clear it in no time anyway working through your debt snowball as normal. If you’re not going to get to it for a while, it might be time to look at the 0% deals available to you.
Money Saving Expert has an up to date list of 0% credit card offers, and better yet, you can do a quick check to see if you’d be eligible without it being recorded on your credit history.
What if you can’t get a 0% balance transfer?
If there are no 0% interest credit card deals available to you, it’s really not the end of the world. 5 million, that’s FIVE MILLION people have successfully used the Debt Snowball method of debt repayment and got themselves out of debt. That’s a staggering figure for something that money traditionalists so often tell us is ‘wrong’!
The thing you have to remember is that ultimately, you’re going to be paying off your debts WAY quicker than if you continued to pay the minimum repayments of all your debts, therefore you’re going to be saving a ton of interest anyway.
Should you try and avoid interest if you can? Yes, of course. Should you let it derail you if you can’t? Absolutely not.