I’ll get straight to the point here. If you have credit card debt and you are serious about getting rid of it, here is a proven method for getting it paid off as quickly as possible.

Why The Debt Snowball?

This is a very popular method for reducing your credit card debt. It’s taught by many financial experts and credit professionals, and for good reason. This method is part math and part emotion, which is also why it’s popularity is increasing.

There are 4 basic steps to follow:

Step 1: List your debts in order of outstanding balance and not by interest rate. If 2 balances are roughly the same you can put the higher interest rate card above the one with the lower interest rate. List your smallest balance first and the largest debt last. Like this:

1. $1100 - Min payment $35
2. $3250 - Min payment $98
3. $6000 - Min payment $180
Total payments: $313

Step 2: Add up the minimum payments on all the cards. From the example above the total minimum payments would be $313. Now commit to increasing your total debt payments by at least 25% to 30% more or $100 whichever is higher. For $313 as your beginning minimum payment total a 30% increase would be $94 extra, so lets round that up to $100. You would commit to paying at least $413 every month towards your credit cards.

Step 3: Start making the minimum payments on all your credit cards with that extra 25-30% or $100 going to the debt with the smallest balance. Continue to do this month after month until the first debt has been completely paid off.

1. $1100 - Min payment $35 + $100 = Monthly payment of $135
2. $3250 - Min payment $98
3. $6000 - Min payment $180
Total payments: $413

Step 4: Once your first credit card debt has been cleared, you are going to take what was it’s minimum monthly payment plus the 30%/$100 extra payment and add that to the minimum payment for the next largest debt on your list.

1. Paid
2. $3250 - Min pay $98 + $35 + $100 = Total Monthly Payment of $233
3. $6000 - Min payment $180
Total payments: $413

Continue to do this until debt#2 has been full paid and then repeat the process for the final debt. Your Monthly payments on the last debt will be the full $413 that you have committed towards reducing your total credit card debt.

Helpful Hints

1. $100 should be the minimum amount you commit to in extra debt payments. This will help you eliminate your debt much quicker. If you are on a fixed income or can only scrap together $50 or that is alright as well. Anything over and above the min payments will benefit you, but make an honest effort in trying for the $100 mark.

2. Throw your pocket change into a bowl or dish and every month add that on top of your payments, sell stuff on ebay, take a second job or just give up your morning coffee and throw all that extra income towards your debt snowball. Every little bit helps.

3. Contact your credit card companies and let them know what you are doing. Some companies might take any extra payments and apply the towards your future monthly payments. Let them know that these extra payments are to be applied directly to the principal.

4. Once a debt has been paid off take time to celebrate it, reflect on what you have accomplished and think of new ways to contribute extra money to the next debt. This can be great motivation for tackling the larger and more time consuming debts.

I wish I was making this up but this is a step by step guide on how I got into a ton of debt over the years. My goal here is to help you avoid some of the mistakes that I made and hopefully set you up for a better financial future.

Step 1

Get a student loan and ask for more than you need.

Post secondary education is a very valuable asset and a worthy pursuit; unfortunately this can come with a very large price tag. I wasn’t fortunate enough to qualify for a scholarship and had to foot the bill on my own. Lucky I managed to avoid taking out a student loan and went to a local college where I could afford the tuition (barely). Many of my friends are still paying off their student loans today.

Student loans can burden you for many years after you graduate and if your chosen career doesn’t work out it could take you a very long time to pay the loans back. If you can find a similar program at a local college or university seriously consider attending and save some big money and stress. (if you have kids set up a college fund for them now and ease the burden later)

Step 2

Get a credit card and use it for everyday purchases.

I used to buy groceries, gas and convenience store items on my credit cards with the intention of paying them back right away. While I did manage to collect some big rewards I managed to accumulate a small balance each month that seemed to grow bigger every week until I could only afford the minimum payments.

Many people will tell you to never get a credit card, and for many people that have poor spending and budgeting habits such as I did when I was younger that is sound advice. If you are not an impulsive buyer or use it for everyday purchases though a credit card may in fact be beneficial in helping you build a good credit score. A good credit score is essential if you want to buy a home in the future and not get a terrible interest rate. That is if you are planning on getting a mortgage.

Step 3

Leasing a new car

My first car I ever owned was leased, it looked great and I loved it. After about a year or so the novelty wore off and I was stuck with a 1 year old car that was worth much less than I owed on it. 4 years after that and I decided to buy it out (with borrowed money of course), for about $1000 more than it was worth and then had to pay to have it certified. It took me 8 years to pay for this new car, not to mention the thousands of dollars I paid in interest. Avoid leases and payment plans, if you need a car buy used and save up for a new car.

Step 4

Buy a house with a 25 year mortgage

Did you know that you can buy a home with $0 down? I did and I almost lost it. After a few months I was in over my head.

As a rule you should aim for no more than a 15 year mortgage and put down at least 25% of the purchase price as a down payment. You can get away with 20% in some cases, other than that you should rent and save until you have enough. When it comes to payments if your mortgage payments are more than 40% of your gross monthly income, you can not afford it. (I would go even lower and limit it to 35%

Step 5

Don’t pay a cent for a year - Furnish your new home on store credit

Those deals seem great at the time and you have every intention of paying off the furniture (couches, TVs, kitchen appliances) before the year is over but sometimes life gets in the way and at the end of it you don’t have enough to pay it all off. Then they get you for the whole amount plus interest (28 % for the whole year. ouch).

That happened to me on my first LCD TV I purchased $1400 turned into $1820 after interest and fees. Save up for these big purchases and pay for them in cash. You would be amazed at the deals you can get just by pulling out a wad of cash and making an offer to pay for the item on the spot.

That is basically how you can a mass a huge amount of debt in a relatively short amount of time. I realize I left out the wedding and the kids but those came after I got my financial act together.

The scary thing is that this is the route that millions of people are taking these days and they are in for a major shock when the debt gets so large that the “consumers” will get “consumed” by the payments until they lose it all or make some major lifestyle changes.

Reducing Credit Card Debt With a Debt Snowball
By David Kimball

If you are interested in reducing credit card debt, know that there are no instant solutions, no matter what the slick salesman says. If you are in a situation where it is causing you fits, remember that you did not get where you are overnight. Nor will the problem go away as quickly. But it will go away. And the best way to do it is with a debt snowball.

The Illusion

Be careful. Do not fall for come-ons telling you that you can lower your payments overnight. Oh yeah, in a lot of cases you can lower your payments almost immediately, but that is only by raising your overall debt.

It is how debt consolidation loans work. And is usually an illusion to really living debt free. The loan provider, many times a third party to a debt counseling service, provides you with a loan that lowers your monthly payments. You may reason that by doing this they are saving you money, when they are actually costing you more. In order to lower your monthly payments they are combining your debt. Maybe you have three credit cards they combine or a couple of credit cards and a car loan. They combine this debt together and give you a consolidation loan that costs less per month than the total of the combined bills. They are able to do this by extending the term of the debt. You pay less per month, but over a longer period of time. Therefore, these types of debt consolidation loans cost more in the long-term in extended payments and interest.

The Real Way

The real way to reduce your credit card debt is to pay it down with what is called a debt snowball. Do not fall for any other credit card debt solutions. If you are only making minimum payments, you will practically never get financially free. Even paying a little more on your credit cards each month will help you in a big way.

It is not a stretch to find $10 a month out there somewhere that you are spending on non-essential items. Take that $10 a month and add it to your payment each month on the card with the smallest minimum. You will be surprised how fast you can pay off a credit card this way with a debt snowball. It will not be overnight, but once done you never have to worry about it again — unlike a debt consolidation loan.

Now that you have paid off that first credit card, take the monthly payment from it and add it to your next largest card. If your first card was costing you $20 a month minimum, and you added $10 a month to that, you now take that entire $30 a month and apply it to your second credit card. You will probably pay this one off even faster than the first. Now, you are drastically reducing credit card debt with the goal of complete elimination. What a great feeling!

You Have Made That First Step - This is just one step on the way to your goal of living debt free. Spend less than you make and live on a personal budget to round your plan. This simple feat of using a debt snowball is key to permanently reducing credit card debt and, eventually, how to live a financially free life. Take the next step now and make a household budget. David Kimball is an author and speaker providing financial coaching to help you get out of debt in 24 months or less.

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