What Is Debt Stacking and How Does This Method Work?

Managing multiple debts can present a challenge for individuals seeking financial stability. Developing a clear strategy for debt repayment is a key step. One such strategic approach, known as debt stacking, streamlines debt repayment. This method prioritizes debts, helping individuals become debt-free.

Understanding Debt Stacking

Debt stacking is a strategic method for repaying multiple debts by prioritizing them. Not all debts have the same characteristics, like interest rates or balances, which impacts borrowing costs. Focusing resources on one debt at a time creates a more efficient repayment process.

The core idea involves allocating extra payments to a priority debt while making minimum payments on all other obligations. Once the prioritized debt is repaid, the funds previously allocated to its payment are rolled over to the next debt. This reallocation accelerates debt repayment. This method helps individuals gain momentum and reduce total interest paid.

Methods of Debt Prioritization

Two primary methodologies are used in debt stacking: the debt avalanche method and the debt snowball method. Each approach dictates a specific order for prioritizing debts, aligning with different financial philosophies. Understanding them helps determine the best strategy.

The debt avalanche method prioritizes debts by interest rate, addressing the highest rate first. For example, a credit card with 22% APR would be the initial focus over a personal loan at 12% APR. All available extra funds are directed to this debt while minimum payments are maintained on others. Once the credit card balance is paid off, freed funds are applied to the next highest interest rate debt, continuing until all debts are paid.

Conversely, the debt snowball method prioritizes debts by their outstanding balance, starting with the smallest debt first. For instance, if an individual has a small medical bill of $500, a credit card balance of $2,000, and a personal loan of $5,000, the medical bill would be the first target. Extra payments are concentrated on this smallest debt, with minimum payments made on all other larger obligations. After the smallest debt is fully repaid, the entire payment amount previously dedicated to it is then added to the payment of the next smallest debt, creating a growing “snowball” of funds applied to subsequent debts.

Situations Where Debt Stacking is Applied

Debt stacking strategies are particularly relevant when individuals manage various forms of unsecured debt, where a structured repayment plan can yield substantial benefits. Common types of debt often subjected to these strategies include credit card balances, personal loans, and student loans. Each of these debt categories typically carries different interest rates and repayment terms, making them suitable candidates for a prioritized approach.

For instance, high-interest consumer debt, such as balances on credit cards, which can carry average interest rates ranging from 20% to over 25% APR, are frequently targeted first in debt avalanche strategies due to their significant cost. Personal loans, with average interest rates often between 10% and 15% APR, and student loans, which can have federal rates from around 6% to 9% or private rates varying widely, also represent common obligations that individuals aim to manage. Individuals facing multiple smaller balances across different accounts might find the debt snowball method appealing for its psychological momentum. Whether dealing with a few large debts or several smaller ones, applying a debt stacking method can provide a clear path to financial freedom.