Credit Card Snowball Effect and How to beat it

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!

Who wouldn’t want to achieve debt elimination? No one! Credit cards grow at an exponential rate. What if you could turn this credit card snowball effect to your advantage?

You know what that is, right? Just like a snowball, you roll up in the backyard, credit cards will build up a balance seemingly in moments. As a consumer, you have two choices, get smashed by the credit card snowball effect or turn it around and make it work for you.

Snowballing your credit card balance to achieve debt elimination is not difficult. You take a little each month and add to what you are already paying. You take the balance down faster and therefore the interest you pay, which in turn grows the amount of your next payment that goes toward principle, this is the credit card snowball effect.

First, look at the common practice for paying off credit card debt. This is what conventional wisdom says is the best debt elimination practice:

Gather all your credit card statements.

Rank them in order of interest rate percentage.

Pay as much extra as you can each month on the one with the largest interest rate.

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.

For the sake of argument, lets say that you have two cards with different interest rates. Let us further assume that the interest rates are ten and twenty percent respectively. Choosing which one to pay will depend on the balance on each. If your 10% card is caring a large balance then your monthly interest accrual will be higher than the larger interest rate.

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:

Create a list of all your credit cards and their rates.

Rank them according to amount of actual interest you pay each month.

Add extra payments to this card until the balance is zero.

Pay only the minimum on the rest of your cards until the first is paid in full.

Repeat this process until all cards are paid off.

Life often has many paths to the same goal. Credit cards and debt elimination are no different. Always consider things from all angles before embarking on your debt elimination process.

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