How to Reduce Your Debt Using the Snowball Method

March 20, 2009 by  
Filed under Debt Handling

If you find yourself smothered by a ton of credit card debt and other bad debts, you’re probably researching ways to reduce your monthly payments and total balances owed. Paying down your debts sounds like an easy thing to do, but where do you start? One method, known as the “snowball method”, is easily applied to anyone’s situation as an effective way to rid yourself of any and all debt in a fraction of the time than if you simply continued with minimum monthly payments.

The idea behind the snowball method is relatively simple. Gather all of your debts and monthly bills paid to outstanding lines of credit, and grab a piece of paper and pen.

Next, list your debts in order, starting with the highest interest rate down to the lowest. The plan is to apply any extra funds you can spare to the highest interest debt first, and maintain other loans with only the minimum payments. This method will significantly reduce the amount of interest paid on your debt, and will also drastically reduce your payoff period.

Applying even just an extra $50 to $100 dollars a month will create great results in a short amount of time; you’ll start to see the balance on that highest-rate card decrease with each monthly bill you receive, which will motivate you to continue.

Another form of this method to paying down debt will pay off the smallest debt first, then move to the next one as each debt is paid off. This allows for great short-term results and the feeling of greatly reducing your debts, but you may be paying more than necessary.

This is due to the fact that if you have three balances that charge the same interest rate, the highest balance will cost more in interest than the other two. For this reason, some debtors choose to pay off the highest balance first.

However, this plan can be difficult to stick with since it takes longer to notice results. If you are the type that loses faith easily, you may want to start paying off the smallest debts first.

No matter how you approach paying off your debt, you simply must pay down your balances one way or another. All methods will work, but you have to be able to stick with them to reach your goals.

Another option is to call all of your creditors, explain your situation and that you’re trying to reduce your debts, and ask if you can qualify for a lower interest rate or payment. This will allow you to place even more money toward the debt you choose to pay off first, as well as save in charges and interest in the long run.

After reaching your goal of paying off your debts, you must alter your spending habits to avoid getting into that situation again in the future. Re-examine your monthly budget, and start saving the money you once spent on debt payments for a rainy day or special purchase. You’ll be surprised how quickly it accumulates!