Manage Your Debt - Let's Explore Your Options


Take a new view of the debt snowball

Just as there is no diet that works for everyone, the best and fastest way to reduce debt is whatever works for you. We all have different stories about how we got into debt and different personality traits will call for different strategies to get out. The good news is any of these plans will create financial freedom.

The most commonly advised debt reduction strategy is called the “snowball.” Specifically, picture a snowball rolling down the hill and getting bigger. Usually you’ve seen that snowball as debt crashing down upon you. Instead, see yourself launching the snowball down the hill, watching it take out bigger chunks of your debt.

The first step is to add up your monthly payments and figure out how much extra you can spend on at least one of the debts. Then, pick one of two ways to apply the snowball.

Let’s say you have six credit cards, with balances from $500 to $10,000. The fastest way to paying off all the cards, assuming you can follow this, is to pay off the card with the highest interest rate first.  That might not be the one with the lowest or highest balance. Whatever extra you pay means the less interest you’ll pay later. Once you have that card paid off, that’s when the snowballing begins. Whatever you were paying on that card, now apply it to the card with the next highest interest rate.

For example, say you were paying $75 a month on a card that you recently paid off. Take that $75 and, continuing the example, add it every month to the next card you are paying off. If that payment was $25 a month, it’s now $100 a month. You keep doing that with your debts and before long you start seeing a big difference in how much you owe.

The challenge for many people is that they need to see a zero on a credit card balance sooner to stay motivated.  That’s a big club; so don’t feel bad if this describes you. If that is you, instead of going after the highest interest rate, focus first on the card with the lowest balance. Add something extra beyond the minimum to pay it off quicker. Before long you’ll see the zero you wanted to see and can apply what you were paying on that bill to the next one.  By the time you snowball to the last card your payment will be so huge it will be hard not to see the difference. While this strategy is somewhat slower, there is a psychological benefit to that zero.

Other things to bear in mind while you do this is to apply any extra money you get to debt, helping you enlarge the snowball faster than planned.  If you need more explanation about the snowball, or anything related to credit counseling, talk to an American Financial Solutions credit counselor. Most counseling is free, so chances are good you won’t be adding another bill just by talking to someone who can help.

Published Jan 17, 2014.