# Snowball debt or pay off a large amount?

I recently received a large amount of money, well large in my eyes, around 5000 dollars.

I have the following cards:

• $10619 citi card ($234.35/month)
• $2500 Best Buy Card - deferred interest promotion ending in December, APR 24% • A few small cards with no interest and$10-30 monthly payments.

How should I approach this? I am thinking that paying off bestbuy is probably a good idea, at least before December and possibly taking paying off as much of citi as possible? As a side note,

Is it possible to find out how the interest is calculated for a credit card without calling the company. For example, my current balance on citi is 10,696.17 and my min payment is 234.35. The current interest rate is 13.99 percent. I want to know if I cut the citi card in half for example, how much would the min payment go down?

• Do the math for the following scenarios and post back what the total payoff cost to you would be. 1. Pay the Citi card until the Best Buy interest starts then start paying the BB card. 2. Pay the Citi card off first, then the BB card. 3. Pay the BB card off entirely then the Citi card. Use the option that costs you the least amount in the long haul. Commented Sep 6, 2011 at 20:00
• It would be wonderful if you could reduce your minimum payment by literally cutting your Citi card in half with scissors. That was how I read the last paragraph at first. :) Commented Sep 17, 2016 at 8:38
• The snowball is predicated on the psychological impact of hitting the easy debts first, and immediate rewards for changing behavior. The math says the highest interest rate debt should be first. The comparison (which I didn't compute here) is usually one or two payments over the lifetime of all the debts. Commented Jan 24, 2018 at 1:49

There are some calculators that you can use to figure out the best approach, such as this one by CNN. But in general the rule of thumb tends to be the following:

1. Highest interest rate, regardless of debt.
2. Largest amount if rates are the same.
3. Low interest or "good" debt.

For the purposes of the Best Buy card, I would put it up there at number one so you don't get hit with the deferred interest. No point in giving them more money if you can pay them before the end of the cycle.

Next, I would look at what you have for emergency savings, if you have an account established and that is at a comfortable number than putting the money towards the Citi card might be good, otherwise, split part of the money between savings and the credit cards. If an emergency pops up you don't want to dig a deeper hole because you can't pay for something with cash.

• Thanks the the tips and the calculator, but is there a way to find out if I cut citi by lets say 3000, how much my current min payment would go down. Commented Sep 6, 2011 at 14:48
• Look at your last few bills, the minimum is usually a percent of the current balance, 2% is a common minimum. Commented Sep 6, 2011 at 15:18
• +1 for noting both the highest-interest-first rule and the need to pay off the ticking time bomb that is the Best Buy card. Commented Sep 6, 2011 at 17:24

Pay the Best Buy first. Most of these "Do not pay until..." deals require you to retire the entire debt by the deadline, or they will charge you deferred interest for the entire period. So, if this was a six-month deal, they're going to hit you for an extra $300 in December. • +1 This is an important factor beyond simply paying down the largest debt first. If one of them is suddenly going to double if you don't pay it off, then pay it off. Even if the Citi card had nominally higher interest, I'd still pay off the Best Buy card because it's going to suddenly double in only three months. Commented Sep 6, 2011 at 15:45 I want to know if I cut the citi card in half for example, how much would the min payment go down? If you goal is to become debt-free, the minimum payment shouldn't matter. Even if the minimum payment goes down, continue your current payment amount (or more, if you can afford it) until the balance is paid off. Paying the minimum will just keep you in debt longer. • Good point. Don't worry about the minimum if you can afford to pay more. Commented Sep 12, 2011 at 13:35 Pay the highest rate debt first, it's as simple as that. When that debt is paid (the 24% card in this case) pay off the next one. As far as having an emergency fund is concerned, I consider it a second priority. If one owes 24% money, that$2000 emergency fund is costing $480/yr. Ouch. Avoid the behaviors that got you into debt in the first place, and pay the cards off as fast as you can. When you have no balance, start to save, first into the emergency account, then toward retirement. My advice: • Put$1,000 aside in a savings account. Use an online account like ING so it is more onerous to get at it.
• Pay off the BestBuy card.
• Pay off the smallest balances first.

IMO, all things being somewhat equal, you should always try to retire debts as quickly as possible in most cases, so start with the small cases.

The method of calculating credit card interest is written on the statement. Usually it is "average daily balance method".

Don't sweat the details. Just pay the things off.

• Do you happen to know what the average daily balance" is in mathematical terms? Commented Sep 6, 2011 at 17:33
• Also, what do you mean by ING being onerus? Open a savings account in addition to the one I already have? Commented Sep 6, 2011 at 17:35
• by onerus I think he means that it takes more than zero effort to spend that money (you have to first transfer it to your regular checking account) Commented Sep 6, 2011 at 17:38
• @Xaisoft On a credit card statement, there will be a table that indicates the daily interest rate. Take the average the balance on each day of the billing period multiply by the daily rate and then by the number of days in the billing cycle. This is explained in the fine print on the reverse of your bill by law. Commented Sep 10, 2011 at 3:08

Basically, your CC is (if normal) compounded monthly, based on a yearly APR.

To calculate the amount of interest you'd pay on each of these accounts in a year, pull up a spreadsheet like Office Excel. Put in your current balance, then multiply it by the annual interest rate divided by 12, and add that quantity to the balance. Subtract any payment you make, and the result is your new balance. You can project this out for several months to get a good estimate of what you'll pay; in accounting or finance terms, what you're creating is an "amortization table". So, with a $10,000 balance, at 13.99% interest and making payments of$200/mo, the amortization table for one year's payments might look like:

Balance    Interest    Payment   New Bal
$10,000.00$116.58 -$200.00$9,916.58
$9,916.58$115.61 -$200.00$9,832.19
$9,832.19$114.63 -$200.00$9,746.82
$9,746.82$113.63 -$200.00$9,660.45
$9,660.45$112.62 -$200.00$9,573.08
$9,573.08$111.61 -$200.00$9,484.68
$9,484.68$110.58 -$200.00$9,395.26
$9,395.26$109.53 -$200.00$9,304.79
$9,304.79$108.48 -$200.00$9,213.27
$9,213.27$107.41 -$200.00$9,120.68
$9,120.68$106.33 -$200.00$9,027.01
$9,027.01$105.24 -$200.00$8,932.25


As you can see, $200 isn't paying down this card very quickly. In one year, you will have paid$2,400, of which $1,332.25 went straight into the bank's pockets in interest charges, reducing your balance by only$1,067.75. Up the payments to $300/mo, and in 1 year you will have paid$3,600, and only been charged $1,252.24 in interest, so you'll have reduced your balance by$2,347.76 to only $7,652.24, which further reduces interest charges down the line. You can track the differences in the Excel sheet and play "what-ifs" very easily to see the ramifications of spending your$5,000 in various ways.

Understand that although, for instance, 13.99% may be your base interest rate, if the account has become delinquent, or you made any cash advances or balance transfers, higher or lower interest rates may be charged on a portion of the balance or the entire balance, depending on what's going on with your account; a balance transfer may get 0% interest for a year, then 19.99% interest after that if not paid off. Cash advances are ALWAYS charged at exorbitantly high rates, up to 40% APR.

Most credit card bills will include what may be called an "effective APR", which is a weighted average APR of all the various sub-balances of your account and the interest rates they currently have. Understand that your payment first pays off interest accrued during the past cycle, then pays down the principal on the highest-interest portion of the balance first, so if you have made a balance transfer to another card and are using that card for purchases, the only way to avoid interest on the transfer at the post-incentive rates is to pay off the ENTIRE balance in a year.

The minimum payment on a credit card USED to be just the amount of accrued interest or sometimes even less; if you paid only the minimum payment, the balance would never decrease (and may increase). In the wake of the 2008 credit crisis, most banks now enforce a higher minimum payment such that you would pay off the balance in between 3 and 5 years by making only minimum payments. This isn't strictly required AFAIK, but because banks ARE required by the CARD Act to disclose the payoff period at the minimum payment (which would be "never" under most previous policies), the higher minimum payments give cardholders hope that as long as they make the minimum payments and don't charge any more to the card, they will get back to zero.

• I was looking at the table and I am little confused. My current balance is 10,696.17 with an interest rate of 13.99 and a minimum payment of 234.35. I plan on cutting this down to 4,696.17, but I am unsure on how to calculate what the new minimum payment might be and the new interest charge. I tried doing ((4,696.17 * 13.99) / 12) / 100 which is about 55 dollars. Is this correct? Commented Sep 7, 2011 at 14:19
• That's about right, but remember that most cards now enforce a higher minimum payment than just the amount of interest. Commented Sep 7, 2011 at 14:34

You've already received good advice here, pay off the highest rate card first, in this case the Best Buy card. I completely agree.

To answer your question about the minimum payment, I can't guarantee that this is how Citi does it on your particular card, but several online calculators seem to use the following formula.

Minimum Payment = Fees + (APR / 12) x Balance + 1% x Balance.

I plugged in your numbers and got really close to the minimum payment you mentioned. I ran calculations for balances of 8,500 and 6,500 and got payments of $184 and$141.

You can use this calculator to plug in some numbers for yourself. I found the formula on this page along with a reference stating that Citi uses the formula.

Edited to Add: As Bruce Alderman mentioned in his answer, it's probably not a good idea to just pay the minimum. That calculator I linked to shows the difference between paying the minimum and even a small amount ($50 or so) more than the minimum every month. Something like the difference between 3 and 10 years. • The minimum payemnt calculation is disclosed on the cardholders agreement you receive. It can varry from 1/60th of the unpaid balance to about 4% of the unpaid balance. Commented Nov 1, 2013 at 18:36 Dave Ramsey would tell you to pay the smallest debt off first, regardless of interest rate, to build momentum for your debt snowball. Doing so also gives you some "wins" sooner than later in the goal of becoming debt free. • This is the psychological answer that can be at odds with the correct mathematical answer. It's up to the person in debt to decide if the psychological factors outweigh the mathematical ones. Commented Sep 7, 2011 at 16:59 • Is it really up to them? I mean, psychology is the study of what people do, not what they should do. It always irks me that people point out behavioral quirks like they're a good thing. They're flaws to be recognized and compensated for. Commented Sep 8, 2011 at 0:15 • It depends on your personality. I'm an INTP, so the thought of paying a few bucks more in interest wipes out any psychological "win" I feel from paying off my smallest debts. Commented Sep 8, 2011 at 11:47 • I think Ramsey is right for the most part. Not only do you feel better, but if you have many accounts, the sooner you retire debt, the more you can focus your payments on the next one. If you have a few typical credit cards with rates of 12-17%, the difference in rate is negligible. IMO, 28% deferred interest on a store card is an issue that needs to be dealt with immediately -- including returning the crap that you bought and probably didn't need. Commented Sep 10, 2011 at 3:11 • I find the benefit in paying off smaller, even tho less interest, loans is the flexibility. If paying off all your loans is a pretty easy affair, then I would pay off the higher interest, regardless of size. If money is tight, getting some of them off the books frees up some monthly bills. Commented Sep 12, 2011 at 13:40 First, make sure you have some money in a savings account that you can use instead of credit cards for making future purchases that go beyond what you have in your checking account.$1000 is a good amount to start with, so just take that out of the $5000. Then pay off the Best Buy card. You shouldn't be worried about the minimum payment. Determine what you can pay per month (say,$400), and take the minimum payments out of that. Then choose one card to get the rest of your $400, plus the remaining$1500 of your $5000. This should be the highest-interest card, mathematically, but it may or may not be your best choice; it depends on your personality. Some people get a psychological lift out of seeing debts disappear, and it gives them more motivation to keep going. Those people may be better served by paying off the smallest debts first, to get them out of the way. I'm an INTP, so it bothers me more to think that I'll be paying a little more in interest over the long term by taking that route. I agree with the Dave Ramsey method as well. If you don't have$1k in the bank already, do that. Total up the smaller debts and the best buy card. if they are $4k all together, then pay them off. Don't get caught up in keeping the smaller one around because they are at zero percent. If they exceed$4k, then payoff the interest bomb best buy card, then pay off the smaller ones, starting with the smaller balance. That is the only tweak I will make here. Dropping any amount into the Citi balance is pointless because it only reduces the amount, not the total number of hands reaching into your bank account.

• And as Ramsey says, "focus on getting out of debt with Gazelle like intensity". Commented Dec 4, 2014 at 1:15