If you've ever carried credit card debt (and most of us have), you know how difficult it can be to get out from under it. The Federal Reserve's data shows that as of the fourth quarter of 2018, the average APR for all credit card accounts is 14.73%. With interest rates like that, it's no wonder so many Americans struggle to pay off credit card debt.
When you're ready to tackle your debt, it pays to be strategic. There are several approaches you can take. Popular examples include the Snowball method and the Avalanche method. The Debt Lasso method is a little more complicated but can save you money on interest and get you out of debt sooner.
The Debt Lasso Method: How it Works
The Debt Lasso method, created by Debt Free Guys, combines good old-fashioned debt consolidation with the Avalanche method.
In case you don't know, the Avalanche method involves tackling your most expensive debt first, while making minimum payments on everything else. Once you've paid the highest interest debt, you focus your efforts (and any recouped cash) on the next most expensive debt. And so on and so on, until you're debt free.
With the Debt Lasso method, you shift around credit card balances so that you have the lowest possible interest rates, and then you prioritize your most expensive debt.
How to Apply the Debt Lasso Method
To apply the Debt Lasso method and obliterate your debt as soon as possible, follow these steps:
- Take stock of all your credit cards and their interest rates. Rank them from most expensive to least expensive.
- High interest is your enemy; look at options for lowering your rates. The most effective way to do this is to transfer higher interest balances to cards with 0% balance transfer offers. You might have an existing card that could work, but most likely, you'll have to apply for a new card (or cards). If you want more credit, check out our list of 0% intro APR credit card offers.
- Now that you've minimized your interest costs, it's time to get serious about repayment. To protect your credit, you need to make the minimum payment on all your cards. Beyond that, any money you have for credit card payments, including anything you saved by lowering your interest rates, should be applied to the balance with the highest interest rate. This is your most expensive debt, and it has to go! Once that balance is paid off, you move onto the card with the next highest rate, continuing until all your debt is paid.
If 0% isn't an option, lower is still better. You could look at getting a consolidation loan for several of your higher interest cards. If that isn't an option either, you could look at transferring a high interest balance to a card with a lower rate. If you have a card with a 20% APR and one with a 12% APR, it makes sense to transfer the balance of the 20% card to the 12% card (if you have the room).
You can also call your credit card provider and ask for an interest rate reduction. If your card is in good standing, it's a possibility.
Who Should Use the Debt Lasso Method?
The Debt Lasso method is an option for anyone willing to put in a little work to reduce interest costs and repay debt. Realistically, though, it works best for people with decent credit.
David Auten of Debt Free Guys explains, "The Debt Lasso is best suited to those who have an average or above average credit score because they will qualify for lower interest rates on consolidation loans or zero balance transfer credit cards, although many even with poor credit scores can qualify for lower interest rates if they spend a bit of time searching. A great place to start when you have a poor credit score is a local credit union." You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Things to Watch Out for When Using the Debt Lasso Method
Auten cautions that to apply the Debt Lasso method successfully, you need to read the fine print on balance transfer offers.
"Remember that for each balance transfer, you can be charged between 1% and 5%. These transfer fees really add up and cut into your overall savings. Secondly, watch out for missed or late payments, since these can trigger a change in interest rate from the 0% offer to well over 20%, which defeats the purpose of the transfer."
Balance transfer offers usually have an expiry date. Whether the offer is good for three months or eighteen months, you'll want to make sure you repay the debt during that time frame. You also need to know what the interest rate will be after the promotional period – if it will be something terrifying like 30%, you'll need to pay down the balance or transfer it before then.
"If you're not committed to paying off your credit cards that have transferred balances, it may be better to go with a consolidation loan at a low to moderate interest rate, such as 4% to 6%," advises Auten.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.