Solutions To Credit Card Debt  

The Debt Snowball Plan

Solutions to Credit Card Debt is part of a series on eliminating credit card debt.


One of the best solutions to credit card debt is the debt snowball. This method of approaching debt elimination is fairly popular yet there are a lot of people out there dealing with debt that have not put together a plan of attack to eliminate it. The debt snowball plan can do just that.

Many credit card debt solutions have you use some paid service. The debt snowball plan is easy to set up yourself and costs you nothing. A debt snowball can be structured in two basic ways:

Solutions to Credit Card Debt - Prioritize By Interest Rate

You will organize your debts (excluding your mortgage) in order of increasing interest rate from lowest to highest. Let’s use the following example, say you have the following debts at these interest rates:

- Payday loan of $2,500 at 25% interest – minimum payment of $53 per month
- Credit card 1 with $4,400 owed at 19% – minimum payment of $70 per month
- Credit card 2 with $1,500 owed at 10%– minimum payment of $21 per month
- Car loan with $20,000 owed at 5%– payments of $377 per month

Total minimum monthly payments of $521

When you prioritize by interest rate you will make minimum payments on all the accounts. But on the payday loan (highest interest) you will pay as much as you can over the minimum…every cent you can find!

Why?

Because at the higher interest you spend more of your money paying interest instead of principal. With the car loan for example, because of its lower interest rate and duration (3-5 years typically) more of your payment is going to pay principal instead of interest.

solutions to credit card debt, debt snowball, debt snowball plan

Once you organize your debts like this you will make minimum payments on the other accounts and pay as much as you can on the payday loan until you pay it off. So if you have $700 per month to go towards repaying debt that gives you $179 ($700-$521=$179) that along with the $53 minimum payment adds up to $232 that you would pay monthly on the payday loan. The rest goes toward minimum payments on the other accounts.

Paying $232 per month will get rid of the payday loan in 13 months while maintaining your other accounts in current status and avoiding any penalty fees.

But here is why it’s called a snowball - once the payday loan is paid off, you now take the $232 from the payday loan and add it to the minimum payment you were making on Credit Card 1 at 19%...see how that works? Now that you have eliminated the payday loan you “found” extra money to pay towards Credit Card 1.

This gives you $302 ($232 from payday loan + $70 minimum payment on CC1) per month to apply to this card allowing you to pay it off in 17 months!!

For every account that you pay off, you would roll that money that you were paying into the next debt. By the time you get to the car loan, you would have a bunch of extra money above the minimum payment that would allow you to pay it quicker.

Solutions to Credit Card Debt - Prioritize By Amount Owed

Using the same accounts as the example above you would prioritize them by the amount owed regardless of the interest on each, and start making payments on the lowest amount. Something like this:

- Credit card 2 with $1,500 owed at 10%– minimum payment of $21 per month
- Payday loan of $2,500 at 25% interest – minimum payment of $53 per month
- Credit card 1 with $4,400 owed at 19% – minimum payment of $70 per month
- Car loan with $20,000 owed at 5%– payments of $377 per month

So in this case you would again make minimum payments on everything but then pay as much as you can on Credit Card 2, since it is the lowest amount. Once paid off you roll that amount into the payday loan which is next on the list and so on.

The reason you prioritize by amount rather than interest rate is more psychological than mathematical. By starting with the lowest debt amount, you should pay it off quicker and this would give you a motivational boost by seeing one of your debts eliminated as soon as possible.

Which one to choose?

I would recommend you prioritize by interest, because the math does not lie, highest interest accounts will cost you more, period. So I would like to see you get out of debt by paying the least amount of money as possible. But if you feel you would be encouraged by eliminating any debt first then by all means start with the lowest amount.

The good news is that either of these solutions to credit card debt will work.

How do we turn these solutions to credit card debt into wealth?

Ahhh…this is where it gets really exciting!

Remember all that money you were paying on your debts?

Remember how it kept increasing as you rolled it into the next debt?

Well, once you have paid all your debts you now have all this money that you were used to pay in debt every month with nowhere to go because your debts are paid off. Now you can use that money to invest, buy real estate, start a business, put in the bank, pay for college and so on. And since you are debt free nobody is going to take that money away.

However, it is crucial that while you are working on paying off your debts you do it the right way. Check out the real secret for turning debt into wealth…

Please check back soon for the follow-up posts on Solutions to Credit Card Debt or subscribe to my blog and RSS feed so you get the updates when they are posted. You can also receive new content through email.

Photo credit:Brandon Hambright.


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