There is nothing new about the snowball method to eliminate credit card debt, but people still get confused about how to set it up.
There are many ways to do this, but for the most part this method falls into two different processes. Either one will work. It just depends on which will work the best for you.
Snowball by Interest Rate
Debts are listed from highest interest to lowest regardless of balance and paid off in that order. You will end up paying a little less using this option. For instance:
Suppose you have $1000 a month for eliminating credit card debt. This gives a $280 ($1000 – $720) initial snowball amount and all debts would be paid off in 2.7 years with $3,433 in total interest paid.
Snowball by Balance
In this example, debts are listed from lowest balance to highest:
Using this method would take an additional month to pay off with $3,473 in total interest paid – $40 more than sorting by interest. I chose the balance method to eliminate credit card debt. For me it was a real incentive to get that first one knocked out quickly…it felt wonderful!
I want to point out how important it is to have an additional amount over the minimum payment to get the snowball rolling. Even $25 would be better than nothing.
For instance, if you paid only the minimum payments on the accounts listed here, it would take nearly 4 years with close to $5,800 total interest paid. It would also be difficult to stay motivated that long for only 3 accounts, and most people with debt issues have more than 3 to pay off.
If you added just $100 to the scenario above, making the snowball $380, the payoff date would be 4 months sooner with around $400 less in interest paid. With an additional $250, it pushes that date back 6 months with more than $860 less in interest paid!
The name of the game is to be passionate about it with frugal living and eliminate credit card debt as quickly as possible. Once you are debt free, that money is belongs to you to do whatever you wish with it. I’m really looking forward to that day!
Debt Reduction – Download a free Debt Reduction spreadsheet from Vertex42.com.
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