Whether you approach debt repayment as an avalanche or a snowball depends on the type of personality you have.
“Of course, any method of repaying is good,” said Laurie Campbell, CEO of Credit Canada.
The non-profit organization is reminding people about the different debt repayment methods in light of a recent survey that shows the extent that people are unaware of their total debt as well as being unaware of the amount they’re paying in interest.
According to the survey by the polling company Leger of 1,517 Canadians between July 27 and July 31, 42 per cent were concerned, or “freaked out” about the amount they owe while 34 per cent were concerned about the interest on their debt. As well, 65 per cent were aware of the amount they owe, but only 38 per cent knew how much they were paying in monthly interest.
In Atlantic Canada, fewer people surveyed (61 per cent) were aware of their total debt while more (44 per cent) knew their monthly interest payments.
Campbell said it’s concerning to see that only 44 per cent of Atlantic Canadians know the interest rate on their debt.
She suggested in some cases it could be the result of people not wanting to know.
“I think people are resilient to not knowing about things that are harmful to them,” she said.
For example, in cases with a store card and an interest rate of 29.9 per cent and the person is making only the minimum payments on a $100 item, over time the amount paid could be three to four times more than the original amount once interest is factored.
“You can see how financially damaging not being aware of the interest rate (and) what’s happening to your money can be,” she said.
Another part of the survey that concerned Campbell is the percentage of people in Canada, especially in the 18 to 34 age group, that are more “freaked out” about the total amount they owe (50 per cent) than the amount of interest on that debt (26 per cent).
She said more people need to be freaked out about the interest.
Campbell said an example is a university student that is making the minimum payments on a $1,000 credit card debt, and not realizing that the minimum payment is also going to interest as well as the principal.
“She’s freaked out about the $1,000 amount she has outstanding, but not about the fact that she’s only making the minimum payment. And, that is going towards mostly interest, and that’s why her balance is never going to go down,” said Campbell. “She had no idea there is monthly interest being charged.”
To help people tackle debt, Credit Canada has launched an online debt calculator (www.creditcanada.com/debt-calculator) that figures out the outcome of either method applied to a debt based on an amount paid monthly.
Credit Canada’s website explains the two methods. The snowball effect is similar to rolling a snowball down a hill. Once a debt is paid off, the available money is rolled onto the next debt, and so on, and the payments snowball into faster debt repayment.
Campbell explained the snowball effect is for people more troubled about the number of debts they have rather than the fact they’re paying high interest on some of those debts.
The type of person that uses that method concentrates on paying as much as possible on the smallest debt first (regardless of how much interest is being charged) while making minimum payments on the other debts. Once the smallest debt is paid off, they move to the next smallest debt.
“They need to see progress in bringing down the number of debts they have,” she said.
The avalanche approach is similar to debt stacking.
With that approach, a person (usually a Type-A personality) with the same number of debts attacks the one with the highest interest while making the minimum payments on the other debts.
“They don’t care that they’re carrying 10 different debts. They care that they’re paying more in interest on the high-interest debt,” she said.