Reducing Credit Card Debt Part 2 - The Snowball Method

The Snowball method of debt reduction was so named by Dave Ramsey, a very savvy and popular personal finance guru, and the truth is, the Snowball Method just plain works! No matter how much debt you're talking about, no matter what the interest rates, the Snowball Method gives you a framework for paying down all that debt you've accrued over the years, and providing some hope for those of us who find themselves debt-strapped. Perhaps that is the best part of the Snowball Method: the satisfaction and hope that's suddenly a part of your life again seeing your finances headed in the right direction. There may be ways that make this happen faster, and we'll take a look at that in a second, but the basic Snowball Method is a great place to start!

The basics are these: list all your debts in ascending order, from lowest amount to the largest. Make sure to pay the minimum payment on all of these, except the smallest debt. To this one we apply any and all available funds, (which had better be more than the minimum payment, or we have something else to talk about) and knock this particular debt down to size fairly quickly. Once that debt is retired, you start on the next biggest obligation, and work your way up the ladder. The important thing is that once the first debt is gone, you take the money you were applying to the first one, and add it to the minimum you were paying on the next highest debt. This is really the only way it works. You have to be disciplined to "snowball" your payments this way, until all the debt you want to go disappears.

The basic advantage of this method, besides the obvious benefit of paying down the debts systematically, is an undeniable psychological aspect to seeing these debts dispatched one by one. You feel better about yourself, your self-esteem gets a shot in the arm. If you are feeling better, you're a whole lot less likely to make poor, emotionally based financial decisions. ("I'll just put this on the credit card, I deserve it.")

One drawback to the Snowball Method is that it doesn't really take interest rates into account, and by using this method, you will pay more in interest over the life of your loans. This is because two debts; one of $1,000 and one of $10,000 may share the same interest rate, but by paying of the smaller one first, the larger one keeps accruing larger amounts of interest. You can switch up the order of the debts you repay first, by highest interest rates, but this has proven harder for some people to accomplish. The time it takes to retire a larger debt is often too much strain for some people, and they are better off paying more money in the long run.

The Snowball Method has its advantages. It can play a vital role in a sensible debt reduction strategy.