How do I snowball my bills?

From hellodollar.com

Eliminating Credit Card debt: Snowballing

There are a bunch of systems that people use to get out of credit card debt. From talking to people who've successfully conquered credit cards, the system called "snowballing" debt seems to work well.

The snowball system works like this:

Say you have multiple sources of credit card debt. Each one has a different balance, interest rate, and minimum payment. You already know (from using Hello, Dollar's credit card payment calculator!) that only paying the minimum payment on each bill will take years and cost thousands in interest. So you work out a budget that includes some extra money for paying down those debts a little faster.

So, how do you decide which to pay off first? Do you split up the extra money across all the bills? Do you apply all of it to the credit card with the highest ineterest rate?

The snowball system says that you should ignore interest rates, and simply put all of your extra money into the debt with the smallest balance. This way you can get one of your credit cards paid off more quickly.

Once the card with the lowest balance is paid off completely, take the extra money, plus the minimum payment for that card, and start applying it to the new lowest balance debt. Lather, rise, and repeat.

This way, every card you pay off means that much more money paid on the next one. Your total monthly payment never changes until you're out of debt, but the amount on any given card gets bigger and bigger, hence the snowball.

That's all there is to it! Pretty simple, right?

Why it Works

The biggest advantage to snowballing is mostly psychological. It feels great, and keeps you motivated, to see real progress so quickly.

It's also simple to figure out -- it doesn't require you to worry about interest rates. If you did pay off your highest interest debt first, you might save more money than by snowballing. But that's moot if you get discouraged by the apparent lack of progress, or by the complexity, and give up.

The other advantage is that the snowball system eliminates any temptation to start paying a smaller amount as you near your goals, stretching out the time (and interest money!) it takes to get you debt free.

Like any other debt elimination plan, snowballing debt only works if you stop charging! Put the credit cards in a drawer, cut them up, whatever it takes to keep you from getting back into debt! Sure, it might take some frugal living, but that, my friends, is the secret of wealth.

I have an example of this on my blog at http://www.josephsangl.com/?p=20

You can use the Debt Freedom Date Calculator on my "Tools" page as well to calculate the number of months until you become debt-free! You can check it out at http://www.josephsangl.com/?page_id=151

Good luck!