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October 4, 2005
Eliminating Credit Card debt: Snowballing
There are a bunch of systems that people use to get out of credit card debt. From talking to people who've successfully conquered credit cards, the system called "snowballing" debt seems to work well.
The snowball system works like this:
Say you have multiple sources of credit card debt. Each one has a different balance, interest rate, and minimum payment. You already know (from using Hello, Dollar's credit card payment calculator!) that only paying the minimum payment on each bill will take years and cost thousands in interest. So you work out a budget that includes some extra money for paying down those debts a little faster.
So, how do you decide which to pay off first? Do you split up the extra money across all the bills? Do you apply all of it to the credit card with the highest ineterest rate?
The snowball system says that you should ignore interest rates, and simply put all of your extra money into the debt with the smallest balance. This way you can get one of your credit cards paid off more quickly.
Once the card with the lowest balance is paid off completely, take the extra money, plus the minimum payment for that card, and start applying it to the new lowest balance debt. Lather, rise, and repeat.
This way, every card you pay off means that much more money paid on the next one. Your total monthly payment never changes until you're out of debt, but the amount on any given card gets bigger and bigger, hence the snowball.
That's all there is to it! Pretty simple, right?
Why it Works
The biggest advantage to snowballing is mostly psychological. It feels great, and keeps you motivated, to see real progress so quickly.It's also simple to figure out -- it doesn't require you to worry about interest rates. If you did pay off your highest interest debt first, you might save more money than by snowballing. But that's moot if you get discouraged by the apparent lack of progress, or by the complexity, and give up.
The other advantage is that the snowball system eliminates any temptation to start paying a smaller amount as you near your goals, stretching out the time (and interest money!) it takes to get you debt free.
Like any other debt elimination plan, snowballing debt only works if you stop charging! Put the credit cards in a drawer, cut them up, whatever it takes to keep you from getting back into debt! Sure, it might take some frugal living, but that, my friends, is the secret of wealth.
Posted by Frank at October 4, 2005 11:31 AM
Comments
Posted by: Blaine Moore (Run to Win)
at October 4, 2005 12:09 PM
Snowballing (either by balance or interest rate) is a great place to start, but as time passes, it's good to look for better rates.
I was finally able to consolidate all of my credit card debt to one card with a 2.9% rate for the life of the balance.
It will take more time, but I hope to do the same with my student loan debt.
Posted by: Cuccu
at October 4, 2005 12:13 PM
I used the debt snow-ball...it worked for me!
(Most people who claim to like to crunch the old numbers actually spend more time "tinkering" with their "system" than actually paying off debt...intresest matters, but principal kills...)
ncnblog.com
Posted by: ncnblog
at October 4, 2005 4:50 PM
sorry about my crud spelling on first comment...
Posted by: ncnblog
at October 4, 2005 4:50 PM
Completely off the subject, but can't seem to locate an email on the site...where do you want submissions for the Carnival of Personal Finance submitted?
Posted by: pfadvice
at October 5, 2005 3:49 AM
Thanks for the comments. You're right, it is important, at the very least, to understand what the differences in interest rates will mean to your bottom line. But something is better than nothing, and this one has benefits that I mentioned -- quick results and it's easy. So don't throw it out without considering what will work best for *you*.
Posted by: Frank
at October 5, 2005 7:12 AM
pfadvice: FYI, you can always get the current carnival host by mailing to carnival@consumerismcommentary.com. But if you prefer to email me directlly, I just moved my email address (it was buried in one of my first posts) to the "About" sidebar: frankp [at] gmail [dot] com.
Posted by: Frank
at October 5, 2005 7:17 AM
I used this same method when I was trying to get out of debt. At the time I had almost 4k in credit card debt and 7K on my car loan. Now all of that has been paid off and less then 18 months later.
Now I just need to work on my student loans and the house I just purchased.
Posted by: Audrey
at October 5, 2005 8:51 AM
Warning! Shameless self-promotion ahead... I wrote up a detailed comparison of various methods of paying down debt:
http://www.fivecentnickel.com/2005/05/09/dave-ramsey-is-bad-at-math/
I'm with Blaine on this one... Attack those higher rate debts first.
Posted by: fivecentnickel.com
at October 6, 2005 6:48 PM
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I do not really like this version of the snowball. I like the idea better of using a snowball theory to tackle your cards, but to pay off the highest interest rate first rather than the lowest balance. If you have the majority of your debt on a high rate card, it may make more sense to transfer some of that balance to a lower rate card (depending upon fees) or to go with a promotional rate card that has free balance transfers and a low or 0% rate.
Then again, I am not afraid to crunch some numbers to see what is most feasible for me, and I have almost no credit card debt. I have a lot of student loan debt, a small vehicle loan debt, and a negligible amount of credit card debt.