Eliminate Debt Faster Using the Credit Card Snowball Effect

By Phil Crafton

Americans have on average three credit cards per household carrying a combined balance of nearly 12,000 thousand dollars and most are just paying the minimum payment due.

You are already aware that this is taking you deeper into debt and further from debt elimination. In fact, your balances are likely growing on you seemingly moment by moment. Do not give up there is a better way!

Using what is known as the credit card snowball effect you can pay down then pay off all of your credit cards. Currently you are floating along only doing the minimum, this way you take an active role in your debt elimination.

Let's take a closer look at a snowball. You start small and soon after rolling over and over they can build massive. Does that sound a little too familiar with your credit? Apply the credit card snowball effect in the positive way and you'll see it works.

Credit cards grow so fast due to something called compound interest. To put it simply when you only make the minimum payment you likely are not even covering the interest. Now that interest ends up as part of the balance and next month, you will be assessed interest on the new balance. Sound like a credit card snowball?

There are many people who will tell you to pay off the card with the highest interest rate first. This is what that plan will look like:

Write down all your cards.

Rank them in order of interest rate percentage.

Pay extra on the card with the highest interest percentage.

Repeat this process for all of your cards as you pay them off.

There seems to be nothing wrong with the above example for debt elimination, and sometimes it is that simple. Nevertheless, situations are not all created equally and there will be times that demand a different solution.

All of your credit cards have different balances and interest rates. It would only seem to make sense to pay off the highest interest first. Nevertheless, consider these numbers.

To put this in terms that make sense consider the interest on your different cards and how your balance affects that number. Say, you have a credit card with a $5,000 balance at 10% interest; this means your monthly interest is fifty dollars. On the other hand, say that the other card has a $2000 balance at 20% interest rate. Your monthly interest would be forty dollars. The higher interest rate is actually cheaper per month.

Conventional wisdom in the above case does not apply to debt elimination. The lower interest rate card in this example will actually increase your debt faster than the higher interest rate card.

Let's take another look of how to use the credit card snowball effect to your advantage:

Create a list of all your credit cards and their rates.

Start with the one that accrues the highest interest every month.

Add extra payments to this card until the balance is zero.

Pay only the minimum on the rest of your cards until the first is paid in full.

Repeat this process until all cards are paid off.

Looking at it, this way it is easy to see that this will be the fastest road to debt elimination. It is important to always consider financial issues from many angles. This is doubly true with credit cards.

About the Author:

Philip Crafton is a professional at managing credit, he has over four years experience in the finance and credit industry. Apply for 0% interest credit cards and more at www.Credit-In-Minutes.com. Copyright 2008 credit-in-minutes.com