One of the concepts that Dave Ramsey, the well-known personal finance guru, has made famous is “debt snowballing.” Debt snowballing is a way to aggressively reduce credit card debt by strategically adding to minimum payments. The process requires introspection and discipline, but once applied it can make a big difference in your personal finance situation.
How Debt Snowballing Works
If a balance transfer credit card is not an option, debt snowballing can help you with your credit card debt. Your first step is to look at your budget and figure out how much money you have available to apply to debt reduction. Dave Ramsey points out that you should be sure to cut back on unnecessary expenditures in order to make more money available for paying off debt. He has even recommended getting a second job in order to facilitate aggressive debt reduction. At any rate, you need to re-evaluate your budget and decide how much money you can use each month for debt reduction.
Next, order your credit card debt. For morale purposes, Ramsey suggests that you list your smallest balance first, so that you can receive encouragement by paying off debt. You can also list your credit card balances according to interest rate, which will save you the maximum amount of money. List your minimum payments as well. Here is an example of a possible credit card debt list:
Credit card No. 1: $650, $20 minimum payment
Credit card No. 2: $1,260, $35 minimum payment
Credit card No. 3: $2,700, $81 minimum payment
Credit card No. 4: $3,200, $96 minimum payment
Let’s say you find $150 a month that you can use for your credit card debt reduction. You take that $150 and add it to the minimum payment on credit card No. 1, making a monthly payment of $170 until it is paid off. You continue paying your other minimum payments as usual. When you pay off your first debt, you take the entire $170 and add it to your next minimum of $35 for a total of $205. You continue the process, adding to your minimum payments. If you can add more money to the debt snowball, you do this in order to pay off your debt faster. For additional help, see the Debt Snowballing Calculator.
By concentrating your payments through debt snowballing, you will be able to use your money to maximum advantage when paying down debt, ultimately helping you pay off your credit card debt faster.
