How Does Debt Stacking Work?

Debt has become a way of life for most Americans, it seems. The Federal Reserve reports that as of October 2010, Americans carried nearly $2.4 trillion in debt. About $800 billion of that is revolving debt, which is primarily carried on credit cards. Total revolving debt has decreased from $957.5 billion in 2008, suggesting Americans may be making a concentrated effort to pay off their debt.

Debt Stacking Principles

Debt stacking is a method to pay off debt that can shave years and dollars off of your debt repayment plan. With debt stacking, your prioritize the order in which you want to pay off your debts. Each time you pay off a debt, you apply the amount you were paying on that debt toward the next debt on your list, while paying the minimum on your other debts. The more debts you pay off, the larger your enhanced payment and the faster you pay off each debt.

Arranging Your Debt Stack

List all of your debts, along with the current balance, the credit limit and the interest rate. The order in which you pay off your debts will depend on your goals. If your primary goal is to get rid of your debt quickly and stop paying interest, sort your debts by interest rate and pay them off from highest to lowest. If you want to get rid of debt but need to see progress to stay motivated, pay off your debts in order of balance, from lowest to highest. If you're concerned about your credit score and you have cards that are close to the limit, pay down the cards with the highest utilization first. If you don't have a specific goal other than getting out of debt, combine these approaches. Pay down cards that are within a few hundred dollars of the limit, to perhaps 70 percent utilization, then pay off a small balance, then stack the debts by interest rate.

Debt Stacking vs. Debt Snowballing

You may have heard or read advice to "snowball" your debt. Some people refer to debt stacking as debt snowballing, likening the enhanced payment to a snowball that gains size and speed as it rolls downhill. Others only consider it debt snowballing when your pay off your debts in order of lowest to highest balance, and only debt stacking when you pay off your debts in order of highest to lowest interest rate. Whichever moniker you use, the underlying principles are the same: pay off your debts in a specific order, and apply the payment from a cleared debt to the next one on the list.

Monthly Payments

When you begin your debt stacking program, add up the minimum payments for all of your cards and set that as your constant monthly payment amount. As you pay off your debt, the minimum monthly payment amounts will decrease; by keeping a constant monthly payment amount, you will pay more each month toward the debt at the top of your list and pay your total debt off faster. Pay more than the constant amount whenever possible, but never less.