How to Pay Off Credit Card Debt — Avalanche, Snowball & Interest Savings

Understanding Credit Card Interest: The Real Cost of Debt

Credit card interest is compounded daily, making it far more expensive than most borrowers realise. The APR (Annual Percentage Rate) is applied to your average daily balance, then added to your statement monthly.

Daily Interest Formula:
Daily Interest = (APR ÷ 365) × Average Daily Balance

Example:

• Balance: £3,000
• APR: 24.9%
• Daily rate: 0.249 ÷ 365 = 0.000682
• Daily interest: £3,000 × 0.000682 = £2.05
• Monthly interest: ~£61.50

This means over £738/year in interest alone—money that could be saved or invested.

The Payoff Timeline Formula

The number of months to pay off a balance is calculated using:

N = -log(1 - (r × B) / P) / log(1 + r)

Where:

• N = Months to payoff
• r = Monthly interest rate (APR ÷ 12)
• B = Current balance
• P = Monthly payment

Example:
£5,000 balance at 22% APR, paying £200/month:
r = 0.22 ÷ 12 = 0.01833
N = -log(1 - (0.01833 × 5000) / 200) / log(1.01833) ≈ 33 months
Total interest: (£200 × 33) - £5,000 = £1,600

Paying only the minimum (often 1–3% of balance) can extend this to 10–20 years.

Debt Avalanche vs. Debt Snowball: Which Strategy Wins?

Both methods require you to:

1. List all credit card debts
2. Make minimum payments on all
3. Allocate all extra cash to one card at a time

Debt Avalanche (Mathematically Optimal)

• Priority: Highest APR first
• Result: Minimises total interest paid
• Best for: Analytical, numbers-driven individuals

Debt Snowball (Behaviourally Effective)

• Priority: Smallest balance first
• Result: Quick wins build motivation
• Best for: Those needing psychological momentum

Real-World Example:
| Card | Balance | APR | Min Payment | |------|---------|-----|-------------| | A | £1,200 | 29.9% | £36 | | B | £4,500 | 18.9% | £135 | | C | £2,800 | 22.9% | £84 |

• Avalanche order: A → C → B
• Snowball order: A → C → B (same in this case)
  But if Card B were £800, snowball would do B → A → C, costing slightly more in interest but providing faster emotional payoff.

The Power of Extra Payments

Even small additional payments have a non-linear impact due to compounding interest reduction.

Example:
£4,000 balance at 24% APR

• Paying £150/month → Paid off in 38 months, £1,700 interest
• Paying £200/month → Paid off in 26 months, £1,200 interest
  Saves £500 and 12 months with just £50 extra/month.

Pro Tips & Common Mistakes

• Stop using the cards: Freeze them or cut them up. New charges sabotage your plan.
• Automate payments: Set up direct debits for at least the minimum to avoid fees.
• Negotiate lower APRs: Call your provider—mention competing offers or financial hardship.
• Consider a 0% balance transfer: Move debt to a card with 0% intro APR (watch for 3–5% transfer fees).
• Use windfalls wisely: Tax refunds, bonuses, or gifts should go straight to principal.
• Don’t close accounts immediately: Closing cards can hurt your credit utilisation ratio. Pay off, then keep open with £0 balance.
• Beware of “minimum payment traps”: Minimums are designed to keep you in debt for decades.

When to Seek Professional Help

If your total unsecured debt exceeds 50% of your annual income, or you’re missing payments, consider:

• Non-profit credit counselling (e.g., StepChange, National Debtline in the UK)
• Debt Management Plan (DMP): Consolidates payments at reduced interest
• Avoid debt relief scams: Never pay upfront fees for debt “settlement”

Practical Applications

• Budget reallocation: Use a Budget Calculator to free up £50–£100/month for debt.
• Side income: Dedicate gig economy earnings (e.g., Uber, Fiverr) entirely to debt payoff.
• Debt tracking: Use a spreadsheet or app to monitor progress and celebrate milestones.
• Prevent relapse: Once debt-free, build a £1,000 emergency fund to avoid future credit reliance.