How Does Debt Stacking Work?

by Steve Lander
Stacking debts can speed up payoff times.

If you've built up some debt, you know that it can be hard to get it paid off and to get out of it. While making your minimum payments is enough to not be reported as late, it can also take decades to pay off some debt with this method. On the other hand, just adding a few dollars to every bill might not seem that effective. Debt stacking is a method that you can use to devise a payoff strategy for the money you owe.

Debt Stacking Basics

Under this strategy, you make your minimum payments on all of your bills but send all of your extra money to one bill to get it paid off more quickly. Once you pay off your first bill, you take the money you were sending that creditor and send it to the next one down the line together with the minimum payment you were sending that creditor. As you pay off bills, your monthly payment for the next one goes up even though you are not spending any more of your own money. Generally, when you do debt stacking, you pay off your debts in order based on their interest rates, with the highest rate debt being paid off first.

Three Debts

For instance, take a borrower with three debts -- a $500 credit card at 19.99 percent with a $20 minimum payment, a $1,000 credit card at 27.99 percent with a $35 minimum payment, and a $6,000 36-month used car loan at 11.99 percent with a $199.26 minimum payment. Now, assume that the person decides to spend $350 on debt retirement, even though her payments only add up to $254.26. If she allocated the extra money proportionally based on the size of the debts, she would take 23 months to pay off the small card, 29 months to pay off the big card and 25 months to pay off the car.

Stacking Debts

Under a debt stacking plan, she would start by paying $199.26 on the car, $20 on the smaller (but lower rate) credit card and the $130.74 balance on her larger credit card. After roughly nine months, that card would be paid off. At that point, she can start sending $150.74 to the $500 card, which would get paid off in about three months, since its balance had already been paid down a bit. Once she's done with that, she takes the entire $350 and sends it to her car lender. Since, after a year, her car has been paid down to around $4,200, the $350 payment gets it paid off in about 13 months. This means that she will be completely out of debt in a total of 25 months -- two years and one month.

Stack vs. Snowball

Another popular debt payoff method is the debt snowball. It works similarly to debt stacking, but with one difference. Instead of paying off your debts in order by their interest rates, you pay them off based on their balances -- from low to high. While you may pay more interest with the snowball method, you also may get the satisfaction of paying off balances sooner. For some people, that psychological reinforcement can make them more likely to stick to the program and to succeed.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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