Snowball Method to Eliminate Credit Card Debt

Imagine what happens to a snowball as it rolls down a mountain. Are you picturing that snowball rolling down the mountain, getting larger and larger as it increases speed? Well, that is the idea behind the snowball method to eliminate credit card debt and other forms of consumer debt.

The first step in the snowball method of eliminating debt is to write down all of your debts in order based on the interest rate. The important information to write down is the current interest rate, overall balance and the minimum payment required. Once you have this list of information, assign each debt a ranking based on the interest rate. The debt with the highest interest rate will receive the highest ranking. In the event that you have more than one debt with the same interest rate, assign the debt with the lowest balance the highest ranking.

The rankings assigned to each debt will be the order in which you focus on your overall debt reduction using the snowball method. The trick to the snowball method is that there is a predetermined amount of money available for debt reduction on a monthly basis, which will be divided up among all of the debts on your list. Each debt on the list will receive the absolute minimum payment on a monthly basis. The debt with the highest ranking, which also means the highest interest rate, will receive the minimum payment plus all additional funds that have been set aside for debt reduction. The amount available for debt reduction will be determined by your personal budget. If you do not have a budget at this point, it is highly recommended to take the time to develop a personal budget or spending plan as it will make it much easier to implement the snowball method.

Once the debt with the highest rate has been eliminated, you roll that payment into the minimum payment being paid to the next highest interest rate. Thus your main payment continues to grow, or snowball, as you eliminate the debt. Similar to the snowball rolling down the mountain, your snowball payment continues to get larger and larger and eliminates more and more debt as time passes.

Here is a brief example to help illustrate the concept. If you have three credit cards with the following details, assume you have $800 each month to apply to debt repayment:

Card      Rate    Balance   Min Payment    Actual Payment
Chase     17.9%   $3000     $ 90.00        $350.00
Citibank  14.9%   $8000     $240.00        $240.00
Discover   9.9%   $7000     $210.00        $210.00

Now, once the Chase credit card is paid off, you roll the $350 payment into the $240 minimum payment going towards the Citibank credit card, resulting in an overall payment of $590 to Citibank and the $210 minimum still being paid to Discover.

Card      Rate    Balance   Min Payment    Actual Payment
Chase     17.9%   $0        $  0.00        $  0.00
Citibank  14.9%   $8000     $240.00        $590.00
Discover   9.9%   $7000     $210.00        $210.00

While this is a very basic example, it does help illustrate the point of how powerful the snowball method can be to eliminate credit card debt. When coupled with the leverage of low-rate balance transfers, the snowball method is an outstanding tool for debt reduction.

As an added bonus, you might want to reference the snowball calculator as it will allow you to test difference scenarios and let you see exactly how long it will take to eliminate debt and how much interest it will cost. In addition, one really nice feature is the ability to input teaser rates and see how that can impact your overall debt strategy. Note: This is an Microsoft Excel spreadsheet. If you do not have Excel, you may want to investigate

Notes and Additional Information

While ordering your debt by interest rate will result in the least amount of interest paid over the life of the debt, some people prefer to take a different approach. One common alternative is to pay the debts with smaller balances first as it provides a mental reward for eliminating some of the debt. Another alternative is to pay the debt with the largest minimum payment first, maybe a car loan, as that will likely free up the largest minimum payment to be applied to the next debt and increase the size of your snowball payment.

Basically, it boils down to formulating a plan that will work the best for you and your personality. One of the most important aspects of any debt reduction strategy is to create a plan that you will be comfortable implementing.

For answers to any specific questions about this approach or assistance with the creation of an individual debt reduction strategy, please comment below.

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6 Responses

  1. The snowball method is the best method for people who are strong enough to tackle their debt problems on their own, however many people do not have the time or discipline to do it on their own.

    • mnc says:

      Steve, I believe that anyone can learn the necessary skills and habits to eliminate debt on their own but they have to want that for themselves. It isn’t easy to do but I truly believe that everyone has the potential to do it.

      For the people without the time or discipline, are you recommending a debt counseling service? What would they do in place of using the snowball method?

  2. Yes either a service such as a credit counseling service or a debt settlement service. Both are methods have their respective pros and cons.

    It really depends on the situation you are in.

    Please do not get me wrong the debt snowball is a great self debt relief method. But most people are somewhat lazy and will not do what it takes on their own. they will do what is easiest, which is paying minimum payments forever.

    • mnc says:

      Steve, you’re right that there are too many people that look for the easy or quick fix to all of their problems.

      Looking at your site and your comments, I have the impression that you have quite a bit of knowledge/experience in the area of credit counseling and/or debt settlement. If you’re ever interested in writing a guest post for me, let me know.

  1. August 17, 2006

    […] Are you currently in debt?  Do you feel lost at times and are not sure what course of action you should be taking?  Are you confused with your credit card terms?  If you are struggling to get yourself out of debt, please reference the recent article on the snowball method to eliminate credit card debt. […]

  2. March 1, 2007

    […] add the additional funds directly to your debt reduction snowball payment. You are following the snowball method of debt elimination, […]

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