What Is the Debt Stacking Method

Debt exists in many different forms. You may currently possess debt from loans, like mortgages, student loans, personal loans, and car loans. You may also have debt from credit cards.

If you’re looking for ways to pay down your debt, you’ll find that there are a couple of strategic options available. One such option is known as the debt stacking method. The debt stacking method is a payoff strategy that has you focused on putting extra money toward your debt with the highest interest rate.

In this article, we’ll cover everything you need to know about the debt stacking method. Specifically, we’ll go over what the debt stacking method is and how it works. We’ll then touch on both the benefits and downsides of a debt stack. Lastly, we’ll cover a few alternatives to the debt stacking method. By the end of this article, you should have a much better idea of whether the debt stacking method is a smart financial decision for your personal situation.

What is the debt stacking method?

The debt stacking method is a strategy that you can use to potentially become debt-free. The debt stack method is also commonly referred to as the debt avalanche method.

Under the debt stacking method, you won’t take on any new debt, and you’ll make the minimum payment each month on all of your existing debts. If you have extra money, you’ll apply it to the debt with the highest interest rate. By doing so, you’ll reduce the total amount you’re charged in interest by the various financial institutions lending you money.

How does the debt stacking method work?

The debt stacking method calls for you to pay down your high-interest debt, regardless of the balances on these debts. Let’s say, for instance, that you have the following debts:

Student loan debt: $15,000 with a 4% interest rate and a $100 monthly payment
Auto loan debt: $20,000 with a 2% interest rate and a $500 monthly payment
Credit card debt: $5,000 with a 15% interest rate and a $50 monthly payment

Under the debt stacking method, you would focus on paying off the debts in the following manner:

Credit card debt
Student loan debt
Auto loan debt

As mentioned, you’ll need to make the minimum payment on all debts. Based on the above example, the total value to do so is $650. So, at the very least, you’ll need to make sure that you have $650 in your monthly budget allocated toward your debt repayment plan.

Any extra cash flow at the end of the week or month will be put toward the debt with the highest interest rate. In our example, that would be your credit card debt. So, let’s say that at the end of the month, you have $250 left over. You can put this toward the balance on your credit card debt.

Once you pay off the debt with the highest interest rate, you can move on to the next debt. In this case, that would be your student loan debt. Repeat the cycle. However, because your credit card balance is now nonexistent, you can reallocate a previously existing $50 monthly payment to your student loan debt. You’ll continue to repeat this cycle until you pay off the debt with the lowest interest rate.

It’s important to emphasize that the debt stacking method only works if you don’t take on any new debt. Otherwise, your balances will keep growing. And, because of things like compounding interest rates on credit cards, your balances may grow faster than you can pay them off. If you are truly looking to pay off debt and get your personal finances in order, you’ll need to stop taking on new debt.

What are the benefits of a debt stack?

The primary benefit of a debt stack is that paying off the debt with the highest interest rate reduces the amount of total interest charges from your lender. Essentially, you are focusing on paying off the debts that cost you the most money.

If you have something like credit card debt, which can come with a double-digit interest rate, debt stacking can be effective because you’re focusing on the debts that can wreak the most havoc on your personal finances.

What are the downsides to a debt stack?

A downside to a debt stack is that it may not be the best option if you are looking to pay off debt fast. As we’ll detail below, other options, like the debt snowball method, focus on first paying off debts with the smallest balances. By paying off your smallest debts, you may quickly gain momentum toward tackling your higher-interest debts.

The debt stacking method is different because it does not focus on your balances. Hypothetically, your largest balance could also be the debt with the highest interest rate. So, it may take a while before you pay this debt off.

However, you should remember that by reducing the balance on debt with the highest interest rate, you’ll likely save yourself money in the long run. If you’re more worried about the big picture, then a debt stack could be a useful option.

Are there alternatives to debt stacking worth considering?

Debt stacking can help borrowers pay off debt, but it’s not the only path available. Below are two options you may want to consider.

The debt snowball method: With this option, you’ll pay off your smallest balances first. This method works because you may score a quick win and pay off a balance quickly. Knowing that you’ve paid off a debt can provide peace of mind, and motivate you to keep going. However, the debt snowball method could end up costing you more money in the long run if you have large balances with high interest rates. The debt snowball method does not take interest rates into account — only balances.
Line of credit: Another option that you may want to consider to help pay off debt is a personal line of credit. A line of credit can help you pay down credit debt quickly and efficiently while saving interest along the way

No matter which option you choose, it’s important to remember that paying off debt takes time. The average American has more than $104,215 in debt. Furthermore, everyone’s financial situation is different and what works for one person may not work for you. Having a plan in place, remaining patient and staying the course can help put you on the path toward financial freedom.

Debt stacking is one option to help pay down debt

When it comes to debt repayment, there are a few different methods and strategies worth considering. One such strategy is known as debt stacking, perhaps more commonly known as the debt avalanche method. With this strategy, you make the minimum monthly payment on all of your debts. If you have extra money, put it toward the debt with the highest interest rate.

A debt stack can be useful because it helps cut down on future interest payments. Essentially, in the long run, it will reduce the total amount of interest charged by your lenders. However, there are a few downsides to this — the biggest one being that, depending on your balance, it can take a while to pay down your debts with high interest rates.