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How Debt-Snowball Technique Works in Paying Off Credit Card Debt

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How Debt-Snowball Technique Works in Paying Off Credit Card Debt

dnhconsults December 30, 2017
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Credit card debt is serious financial burden to everyone who faces it. The only way to get rid of it is to pay it off. There are many ways or techniques that can be used to get rid of credit card debt and one of them is called debt-snowball technique. Let’s explore how the technique works and under what condition, this solution can be applied to resolve debt problem.

Debt-snowball technique involves paying the extra cash toward smallest balance first and works toward the largest debt owned. The technique has gained more recognition recently because it is being used by many financial and wealth experts to help their clients to handle revolving credit, especially in getting rid of credit card debt. Moreover, survey results show that the debt-snowball technique is among the most favorable credit card payment solution as most people have a tendency to want to take care of small, easier-to-handle-of things first.

The basic three steps involved in debt-snowball technique are as follow:

Step 1: List down in ascending order for all debt owned from the smallest to the largest amount. If there are two debts have the same amount, then debt with higher interest rate should be listed on top of the other one, which has lower interest rate.

Step 2: Calculate the amount of money required to pay the minimum of all debts. Determine how much extra cash that can be used to pay toward the smallest balance. Make the minimum payments on the rest of debts and applied the extra cash toward the smallest balance until it is completely erased.

Step 3: Once the smallest debt is paid off in full, do not alter the monthly amount used to pay debts, but apply the payment used to pay the first debt (the minimum payment plus the extra amount) toward the next-lowest balance. Repeat the process until all debts are being cleared.

Psychologically, by using the debt-snowball technique you will see debts go off faster since smaller balances are easier to be paid off under the this technique. This technique works well if the smallest debt has higher interest rate while the larger debts carry lower interest rate. But, if it is the other way round, which the smaller debts carry lower interest rate, while the larger debts have higher interest rate, debtors will need to pay more interest at the end.

This debt-snowball technique is also a preferred solution for people who are less aggressive, but hoping to see their debt being erased fast. Many people, especially those who have tried to pay their high interest rate or largest balances tend to give up after some time because they felt like they were never getting anywhere. On the other hand, the debt-snowball technique provides the psychological lift of pinging debts off in rapid succession by getting rid of the smallest balance first that motivates them to work toward getting their debt settled.

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