Dave Ramsey’s debt snowball
If you are in credit card debt and you are determined to pay it off [which you should be], you have two different ways you can go about doing it.
The traditional way is to pay off the credit card that is hitting you with the highest interest rate first while making the minimum payments on all of your other cards. This is the best way to pay off your debt mathematically and you will get rid of your credit card debt the fastest using this strategy.
However Dave Ramsey, the preacher of financial common sense, urges his followers to pay off their credit card debt by using the “debt snowball method”.
The snowball method is where you pay off your smallest debts first while paying minimum payments on all of your other debts.
Lets pretend that Steve is in credit card debt with 3 different companies, Visa, Mastercard, and American Express.
His debt with Visa is 10,000 dollars and Visa is charging him 18%, his debt with Mastercard is 2,000 dollars and he is being charged 15% by Mastercard. His debt with American Express is 12,000 dollars and AE is charging him 20%.
Using the traditional method, Steve would make minimum payments to the two cards that are charging relatively low rates [Visa and Mastercard in this case] and he would make much larger payments towards his American Express debt.
Using Dave Ramsey’s debt snowball method Steve would make minimum payments towards Visa and American Express and large payments towards Mastercard.
If he has 600 dollars each month to pay towards his credit card debts Steve would put 50 dollars towards Visa, 50 towards AE, and 500 towards Mastercard. After 4 short months Steve would owe nothing towards his Mastercard debt. The 500 dollars he was paying to Mastercard can now go towards Visa, his second smallest debt. After Steve paid off Visa he would now have the full 600 dollars monthly to help him tackle his largest debt, American Express.
If you are completely dead set on paying off your credit card debt and you need no more motivation along the way, make your largest payments to the credit card with the highest interest rate. This is the smartest and best way to tackle credit card debt in a perfect world.
However it is obvious that we do not live in a perfect world. Using the debt snowball method will help the 60-75% of you out their that struggle with motivation to get their finances together. Once you get rid of your smallest debt in a few months you will have the wind at your back and you will really start picking up steam financially.
There is no right or wrong way to get rid of credit card debt. The traditional way of paying off credit cards has its merits but so does the debt snowball method. Do not listen to anyone on the internet or in person that lives by only one of these methods. It all depends on your particular situation and how driven you really are to put credit card debt behind you.