For many readers, this will be a review of a concept you’re already familiar with. But for those not initiated in the ways of the snowball debt reduction method, this handy dandy tutorial should prove quite, well, handy! I enjoy writing articles for those of you just getting into personal finance, and making the decision to take control of your money, instead of having your money keep control over you.
With that said, the Snowball method is one of many techniques you can use to pay off credit card debt. Really, any debt will do, but I will focus on credit card debt in this article.
What is a Debt Snowball?
Snowballing your debt has nothing to do with winter, or frozen precipitation. Unless you want it to, of course. I’m not one to get in the way of people choosing their own path to go on. So, what exactly is this Snowball method?
In a nutshell (mmm, nuts. Sorry, I haven’t had lunch yet.), the snowball method is a simple way to put your credit cards (and other debts) in order by balance, and pay off one debt at a time. In the long run (which I explain in a future article) you will pay more in interest, but this method gives you a great boost, from a psychological standpoint, in following through with your debt reduction.
Snowball Debt Reduction Steps
Here are the basic steps to snowballing your debt:
- Gather all of your most recent credit card statements. (Electronic is fine, too. My preference, actually.)
- Find out the current balance on each credit card.
- Put the cards in order by balance, smallest balance first.
- Pay the most you can to the credit card with the smallest balance.
- Pay the minimum balance on the rest of credit cards.
- Once the first credit card in the list is paid off, give yourself a pat on the back!
- Continue with the next credit card on the list.
Why is the Snowball Helpful?
One of the biggest hurdles for those of us trying to pay off credit card debt is seeing every statement come in every month, seeing the balances on all of those cards, and then getting depressed about how the balances never seem to get any lower. With the snowball method, you can ignore all but one balance at a time, which takes a lot off your mind first of all, and lets you see a balance diminishing over time, a great mental boost!
Debt Snowball Example
I’ll give a simple example of using the snowball method. Let’s pretend we have three credit cards that need to get paid off (if you have more, don’t despair, this works with as many as you have!). Let’s call them Visa, MasterCard, and Discover.
First, look at the balances of each. Let’s say we have the following balances:
- Visa: $6,452
- MasterCard: $8,322
- Discover: $1,255
So, we put the cards in order by balance, smallest to largest. That gives us Discover, Visa, and Mastercard. The minimum monthly payment on the Visa is $128, MasterCard is $166, and Discover is … doesn’t matter! Since the Discover card has the lowest balance, you’ll pay as much as you can to that card.
If you have $500 per month that you use to pay down your cards, pay the minimum on both the larger balances. This leaves $206 to pay down the Discover card balance. Discounting interest, it will take you about 6 months to pay off this card.
Here comes the fun part. Now that you’ve paid off the Discover card, you take the entire amount you were paying on the Discover card, and add it to the payment you’re making to the next card with the lowest balance. In this case, the Visa. So now you will have $334 per month to pay down that card. Once the Visa card is paid off, you have the full $500 per month you use for credit card payments to pay off that Mastercard.
But I’m Paying More In Interest, Aren’t I?
Yes, in the long run, you are paying more in interest. But, if you are more interested in getting the balances brought down in a way that you can see on a monthly basis, and only worry about one card at a time, the snowball method is a great way to accomplish this. Stay tuned for more on what I call the “Anti-Snowball Method” to see how to use a similar plan, but pay the least amount of interest in the long run.
Happy debt snowballing!