Posts Tagged ‘target debts’

The Debt Snowball: How To Pay Off Your Credit Cards Fast

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This is to be used only if you have steady income and you are not more than 60 days behind on your credit card payments. If you are more than 60 days delinquent on one or more credit cards, or you simply don’t have enough income to meet your obligations, consider credit counseling or bankruptcy.

Once you have your budget set up and you know how much money you have coming in and you know where it is going, you can try the debt snowball method to pay off your credit card balances faster. My husband and I have used this method ourselves and in six months, we had paid off four credit cards, so it definitely does work.

The debt snowball method, endorsed by personal finance gurus like David Ramsey, works like this: you pick your smallest credit card and pay as much as you can on it, while just making the minimum payments on the rest. Then once that card is paid off, pick the next smallest and do the same thing, all up the line until you’ve paid off all of your debt.

How much extra should you apply to your targeted debt? As much as your budget  comfortably allows, but it should be at least twice the minimum payment. Why? Because the minimum payment is mostly interest. Anything you pay in addition to the minimum will be applied to principle and allow you to pay it down more quickly. As you pay off your debts, add their old minimum payments into the payment on the debt you’re targeting.  In this way, as your debts shrink away, the payments you’re making will "snowball" into larger and larger payments. By the time you’re tackling your largest debts, your payments will be quite large, more than enough to attack the principle very quickly. Since you’re using money you’ve already allocated out of your budget, you won’t feel any further pinch while at the same time paying off what you owe.

There is some disagreement among financial experts as to whether tackling the debts carrying the highest interest rate or the smallest debts first is best. Advocates like About.com’s LaToya Irby say that it is better to pay off the debts with the highest interest rate and the math is on her side. Over time, the longer you carry high interest rate debt, the more you will pay. On the other hand,  the leading proponents of snowballing from smallest to largest balances like David Ramsey say that the satisfaction gained from seeing results soonest helps people stay motivated to stay on the snowball plan.

Speaking from personal experience, I lean towards tackling the smallest debts first, not only because, as David Ramsey says, it gives you the emotional satisfaction of success that keeps you motivated to continue, it also just makes sense: paying off smaller debts leaves you with more money with which to tackle the larger debts. Yes, over the long run, the debts with the highest interest rate will cost you more money, but at the end of the day,you will end up debt free, and the small kudos points gained from actually seeing those smaller debts disappear is invaluable.

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