Debt Reduction: The Snowball Method

The debt-snowball method is a debt reduction strategy relevant mostly to paying off credit card debt. It has gained popularity over the years mostly due to its endorsement by national radio host, Dave Ramsey.

Here are the basic steps:

1) List all of your debts in order from the smallest balance to the largest balance. This is the most unique feature of the methodology. Most debt reduction strategies emphasize the importance of paying off credit cards with the highest interest rate first.

2) Make a commitment to pay at least the minimum on each debt.

3) Add up all of your monthly income. Add up all of your monthly expenses. Determine how much surplus income you have.

4) Make the minimums on all your debt and apply your surplus income to the smallest balance until it is paid off.

5) Make the minimums on all your debts, apply your surplus income andthe minimum payment from the account you paid off to the next smallest balance.

6) Continue process until all debt is reduced and eliminated.

The name comes from the fact that once the final debts are being paid, the extra amount paid to the larger balances will grow quickly, much like a snowball rolling downhill gathering more snow. What makes this debt reduction strategy distinctive is the fact that it relies more on human psychology than finance. After all, the logical way to reduce debt is to pay down the highest interest credit card first, but as proponents of the debt-snowball argue, this methodology rarely works because it’s very easy to lose momentum.

Disadvantages -It is not a legitimate bankruptcy alternative; not enough debt relief for consumers who are seriously overwhelmed. For individuals who are seeking ways to reduce debt to avoid bankruptcy, this strategy is largely ineffective because it assumes you can afford a substantial amount more than your minimum monthly payments. Debt settlement or debt negotiation may be more appropriate if you fall under this umbrella.

-It is too illogical for some. Another important feature of the debt-snowball strategy is you are supposed to stop any retirement contributions during the plan to free up more money for paying down the debts. Many financial experts dispute this idea citing the fact that the potential gains from tax-deferred, compounding interest is greater than the benefit from paying high interest credit card debt.

If you would like to learn more about our credit card debt reduction strategy, please feel free to call (877) 274-1260 or fill out a form and we’ll contact you as soon as possible.