Pay Off Your Debt with a Snowball

For years, author Dave Ramsey has advocated the "debt snowball," which is a method of getting out of debt so that consumers can live debt free. Specifically, the term debt snowball refers to paying the lowest debt first, then slowly escalating to paying off the larger debts.

Why Debt Snowball?

Ramsey likens the debt snowball to the accumulation of snow. Once you get the ball rolling with those small balances and experience the satisfaction of paying off your excessive debt, it will become exponentially easier to continue the pattern with the larger debts.

Furthermore, a debt snowball will not only help lessen what you owe, but also will improve your credit history. Showing that you are paying off balances will increase your credit rating and improve your financial stability.

How Does it Work?

Let's say that you have three credit cards, each with a balance. You owe $500 on the first, $1,200 on the second and $2,500 on the third. Using the debt snowball method, you would start paying off the $500 balance first and eliminate that credit card debt entirely before tackling the second and then the third.

The purpose of the debt snowball is not necessarily to pay the least interest possible on credit card debt

Of course, a debt snowball does not mean you should ignore other credit card debts with higher balances. Continue to pay the minimum amount owed on all debts to avoid collecting more interest and defaulting on the cards.

For example, using the debt snowball method, you might send $200 to the first credit card company, then pay the minimum $50 (or whatever your credit card issuer requires) on the other two until the first is paid off. Then you would increase the payments on the $1,200 debt until that credit card debt is paid off, and so on.

Does Interest Matter?

One of the criticisms of the debt snowball method comes from financial gurus who insist that accounts with higher interest rates should be tackled first to get out of credit card debt. This is sound methodology, to a point, but only on paper.

The purpose of the debt snowball is not necessarily to pay the least interest possible on credit card debt. Instead, it is primarily based on psychology. You will experience pride and satisfaction once you take care of that smallest credit card debt, which will motivate you to continue with other balances.

Making it Happen

If you decide you want to use the debt snowball method to eliminate credit card debt, the first step is to commit. Without a genuine desire to pay off balances and achieve your goals, you will likely fail.

Start the debt snowball with focus and determination. If you get to a point where you feel like your motivation will not waver, you might tackle those high interest rates. However, first focus on the smallest credit card debt to build momentum.

Steve Thompson