When you find yourself under a mountain of debt, there's nothing more appealing than paying your credit cards off as fast as you can, increasing your credit score on the credit score scale!
One of the most commonly used methods for paying off credit cards fast is The Debt Snowball, made popular by Dave Ramsey. The snowball gives you tangible results and helps motivate you to pay off your debts, but it is somewhat controversial in nature because it doesn't have participants pay off their highest interest debts first.
You can check out the rest of Dave Ramsey's Baby Steps here.
How to Pay Off Credit Cards With a Debt Snowball
In order for any debt reduction method to be successful, you have to be 100% dedicated to getting out of debt. Follow these steps for setting up and using a debt snowball to pay off credit cards:
- Make a list of your credit card debts, putting them in order from lowest balance owed to highest balance owed. Indicate the total balance owed and what the monthly minimum payment for each account is. If you have more than one credit card that you owe about the same amount of money, put it on the list in order of highest interest rate. This is the only time you consider interest rates in the debt snowball method of paying off debt.
- When paying your bills each month, you will pay the minimum payment on all accounts on the list except for the account with the smallest balance. For your account with the smallest balanced owed, you will send every available dollar you have each month until it's paid off.
- When the lowest balance account has been paid off, you then direct the money sent to that account to the next smallest balance on the list. This is why the method is called a “snowball”. Each time an account is paid off, your available money gets bigger, like a snowball rolling down a hill.
- Repeat the process until all credit cards have been paid off.
The snowball method will work with all types of debts, not just credit cards. It's a good idea to figure out how much money you make each month and how much you pay in total living expenses when creating your snowball account list, as well. That way, you'll know how much money you have available to send each month to the first account on your list after all of your living expenses have been accounted for.
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Controversy over the Debt Snowball
Many financial experts question the debt snowball because you aren't paying off debts in order of the highest interest rate first, and therefore you could be paying more money than necessary to become debt free in the long run.
The reason the snowball method works is because you end up making progress right away when you pay off lowest balances first. As you see your debts getting smaller and paid off, it helps motivate you into sticking with your plan. Each account that is paid off gives you more money to apply to the next debt on the list.
Psychologically, the snowball has the advantage of giving you quick progress. It's also an organized method for paying off credit cards, which is an easy to follow plan – you know exactly what to do with your income each month toward your goal for paying off debts.
Set Up A Debt Snowball Spreadsheet
There are a number of budgeting programs available with built-in debt snowball spreadsheets you can use. Alternatively, you can simply open an Excel, Open Office, or Google spreadsheet and set up your snowball tracking document.
List each of your accounts down the left hand side in order of lowest to highest balance. Keep track of how much you send each account each month in the cells to the right of the account list. Using your spreadsheet, you'll also be able to predict how long it will take to become debt free.
Another way is to compile a simple list and put it on your refrigerator. That way you're constantly reminded of your debt and you can track your progress as you mark off each paid card. This may also give you the motivation you need to pay off your credit card debt even faster.
Consolidate or Balance Transfers While You Wait
One other thing that isn't mentioned in the debt snowflake process is to try and either consolidate your other debt or take your higher interest rate cards and move the debt over to a 0% balance transfer card while you're taking care of the initial surge. That way you can potentially save on interest payments in the process (and you might score some points with one of the travel credit cards).
Have you been able to pay off your credit card debt fast? What strategies did you use?