If you are like millions of other people on the planet, you likely have at least three credit cards with balances of ten to twelve thousand dollars. In addition, you are probably still only paying the minimum payment.
You are already aware that this is taking you deeper into debt and further from debt elimination. In fact, your balances are likely growing on you seemingly moment by moment. Do not give up there is a better way!
Using what is known as the credit card snowball effect you can pay down then pay off all of your credit cards. Currently you are floating along only doing the minimum, this way you take an active role in your debt elimination.
Snowballs start out small and unassuming by rolling them around they will grow in a hurry! Now apply this concept to paying down your balance, start with a little extra and watch it snowball until the card is clear of any balance!
A wise person once said that those who refuse to learn about compound interest are doomed to pay it. No truer words were ever spoken! Therefore, lets begin to learn and turn the credit card snowball effect in your favor and put you on the right path to debt elimination.
First, look at the common practice for paying off credit card debt. This is what conventional wisdom says is the best debt elimination practice:
List all your credit cards
Rank them in order of interest rate percentage.
Pay extra on the card with the highest interest percentage.
Rinse, lather then repeat for each credit card in your wallet.
Sounds like good advice doesn’t it? On the surface, this is a great debt elimination exercise and eventually it will work. However there are times and situation where this is not the correct way to reverse the credit card snowball effect.
No two credit cards will have the exact same interest rate. Conventional wisdom says that it only makes sense to pay off highest interest rates. However, look at the example numbers below.
To put this in terms that make sense consider the interest on your different cards and how your balance affects that number. Say, you have a credit card with a $5,000 balance at 10% interest; this means your monthly interest is fifty dollars. On the other hand, say that the other card has a $2000 balance at 20% interest rate. Your monthly interest would be forty dollars. The higher interest rate is actually cheaper per month.
As you can see in the above example this is a time that conventional wisdom does not apply. Fifty dollars a month will soon balloon the balance on that card even though it is the lowest rate in your wallet. Especially if you are making only the minimum payment.
To use the credit card snowball effect your plan might look more like this:
Collect all your credit card statements.
Choose the one with the highest interest accrual each month.
Put all the extra money on this cards.
Pay only the minimum on the rest of your cards until the first is paid in full.
Continue in this manner until all cards have a zero balance.
Sometimes a debt elimination plan means looking at things with a new perspective. This way of using the credit card snowball effect will have you free of your debt woes in no time.