If you're dealing with credit card debt, you know high interest rates make it difficult to get ahead. Even when you're staying on top of your minimum payments, it can take a long time to make a dent in your principal.
Financial gurus usually promote one of two approaches to paying off debt: the Debt Snowball and the Debt Avalanche methods.
The Debt Avalanche method prioritizes paying down the debt with the highest interest first, while the Snowball method focuses on paying the smallest balance first. The Debt Avalanche method results in greater savings, but the Debt Snowball method brings a psychological "win" that can be quite motivating.
A lesser-known approach, the Debt Spiral method, combines the benefits of each.
The Debt Spiral Method: How it Works
Rather than focusing on the highest interest rate or the smallest balance, the Debt Spiral method concentrates on a metric calculated by dividing a credit card's (or any debt vehicle's) balance by its interest rate. This is called the debt-to-interest ratio. When you rank your debts based on this ratio and pay the one with the highest ratio first, you'll save money on interest while spreading out your wins.
Full disclosure: The Debt Spiral method won't save you as much on interest as the Debt Avalanche method would. And you won't get that motivating win as early as you would with the Debt Snowball method. Instead, you'll get the benefits of both by meeting somewhere in the middle.
How to Apply the Debt Spiral Method
If the Debt Spiral method's balanced approach sounds like a good fit for you, follow these steps:
- Divide each credit card's balance by its interest rate. Rank them based on their debt-to-interest ratios, from highest to lowest.
- Make the minimum payments on all your cards – this is essential to protect your credit score.
- Take any extra money you have for debt repayment and apply it to the card with the highest debt-to-interest ratio until the card is paid.
- Move onto the card with the next highest debt-to-interest ratio. Repeat this process until all your cards are paid.
Who Should Use the Debt Spiral Method?
The Debt Spiral method is a good compromise for people who want to save on interest costs but are motivated by paying something off completely.
David Auten of Debt Free Guys, creators of the Debt Lasso method, recommends the Debt Spiral method as an alternative for people with low credit scores. The Debt Lasso method involves lowering interest costs through 0% balance transfer cards or consolidation loans and then paying off the most expensive debt first. Learn more about it here. If you want more credit, check out our list of 0% intro APR credit card offers.
"The Debt Spiral method is probably better suited to those with poor to bad credit scores, since they most likely will not qualify for zero/low interest balance transfer cards or consolidation loans. It is a great place to start when you are trying to improve your credit score before switching over to the Debt Lasso method after 3 to 6 months of working to build up your credit score," says Auten. 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 Spiral Method
The Debt Spiral method is easiest to implement when you're dealing with debt balances and interest rates that aren't going to change. If balances are going up and down, or if interest rates vary, your debt-to-interest ratios change. That means you might have to re-evaluate your priority list.
"Watch out for and make modifications if any of your interest rates change. In addition, if an emergency arises and you use your cards, your calculations could also be thrown off, which highlights the need for an emergency fund of at least $500 before aggressively starting a debt pay off plan," cautions Auten.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.