Debt stacking is a method of repaying your debts faster, one at a time, by reducing the balance subject to the interest rate. Debt stacking is for people who have more than one debt and who have extra money to pay towards the debts.
How Debt Stacking Works
Debt stacking is when you pay off one debt at a time with extra funds, while paying minimums on your other debts. Once you pay one card off, you apply all the money you were paying towards that debt to the next debt, and so on. As you continue to pay off each debt, your payment towards the next debt is higher, and the one after that is even higher.
Beginning the Debt-stacking Process
As an example, suppose you have four credit cards. Card A has a $2,500 balance and a $100 minimum payment; Card B has a $4,000 balance and a $200 minimum payment; Card C has a $9,000 balance and a $250 minimum payment and Card D has a $12,000 balance and a $300 minimum payment. Suppose you normally pay the minimum on all the cards, but after looking at your budget, you find that you can afford to pay $50 extra per month on your debt.
The Process in Action
In our example, you take your $50 extra per month and apply it towards Card A. So you pay the $100 minimum payment, plus $50, for a total of $150. You continue this payment until Card A is paid in full. Once Card A is paid in full, you take the $150 you were paying on Card A and add it to the minimum payment for Card B. Your monthly payment on Card B becomes $350 -- the $200 minimum payment plus the $150 extra. Once Card B is paid in full, you add the $350 you were paying on Card B to the minimum payment on Card C. Your total payment on Card C becomes $600, which is the $250 minimum plus the $350 extra. Once Card C is paid off, you add the $600 extra to the minimum payment for Card D, and your total monthly payment for Card D is $900.
Debt Stacking Accelerates Debt Payoff
Debt stacking pays off your debts fast because it quickly reduces balances, which reduces interest accrual. Once you pay off Card A, you have more money freed up to pay down Card B. Once Card A and Card B are both gone, you have even more money freed up to pay Card C even faster. Once Card D is the only card left, you are maximizing your budget to pay off your debts.
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