Is the Credit Card Snowball Good for You

by John Stevenson on August 1, 2011

Do you have a couple of credit cards, a mortgage, car payments, two student loans, and debts to a couple of friends? If you cannot keep up with all payments and think of the best strategy to reduce your debts, you can consider the credit card snowball method.

The credit card snowball method is used to eliminate credit card debt based on interest rate. Known as debt-snowball method, this debt reduction strategy is applied to the smallest balances first. While paying them off, cardholders cover only the minimum on other, larger debts. Once you pay off the smallest debt, you start paying back another slightly larger card debt.

If you cannot picture it, this is how it works. Imagine you have three credit cards with balances of $200, $350, and $600 respectively. The minimum monthly payments are $30, $45, and $80 a month, and the card holder has additional $85 to devote to debt repayment. He will pay $200 ($30 a month plus $85 additional) toward paying off the smallest balance. In two months, the cardholder would have paid off the lowest balance. The remaining balances will be $260 and $440, as opposed to $350 and $600.

The debt-snowball method comes with one major advantage. From a psychological point of view, borrowers see results sooner. Second, by paying off the smallest balance, the borrower reduces the total debt amount.

In general, the credit card snowball method is good for you if you are looking for a strategy for gradual debt reduction. It is beneficial if you have multiple loans and credit cards to pay off. At the same time, this strategy is intended for persons who can afford to make at least the minimum payment on all credit cards and loans. The snowball method is especially beneficial if you have some extra cash left over.

A major advantage of the method is that anyone can use it if having more than one debt. It is a simple debt reduction strategy, which doesn’t require complicated calculations or special equipment to get rid of multiple debts. The method is especially beneficial if you owe a large sum of money. In addition, it is easy to keep track of your progress rather than consider it an insurmountable burden.

The snowball method is normally not applicable to mortgage debt. Also, if your debt exceeds half of your disposable income, which is your net salary, you may consider using other debt reduction strategies. Another way to go about your debt problem is to pay off your high interest credit cards first and then turn to credit cards with lower interest. This approach helps minimize the costs associated with becoming debt-free.

Yet, eliminating your debt gradually, using the snowball method, will give you a sense of accomplishment. Small but positive results can motivate you to continue with the plan. Moreover, by seeing positive results, borrowers find the strength to deal with long-term, larger debts.

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