Pay Off Credit Card Debt With a Reverse Snowball Method

Consumer CREDIT card DEBT has grown alarmingly in the past few years. With minimum payments of as little as 2% or 2.5% of the principal (plus interest) due each month, it was easy for consumers to charge purchases and keep monthly payments low.

Lulled by low interest rates, the charge card was our friend. Found a great bargain? No problem - charge it. Family vacation not in the budget? No problem - charge it. Before long, many found themselves stretching just to meet minimum payment requirements on multiple charge ACCOUNTS. Then the playing field changed - and the payments went up!

In 2006, Federal regulators pressured revolving CREDIT lenders to collect a more reasonable percentage of the total amount due. The logic was that paying back only 2% monthly could require payments on a $2000 total DEBT to continue for 20 years or more. That's 20+ years of paying interest and the resulting debt would last much longer than the item purchased with the "borrowed" money.

Bowing to Federal pressure, credit issuers raised the minimum payments to 4% (plus interest) monthly. The result was that many families carrying multiple ACCOUNTS with typical totals of $10,000 saw their payment increase by several hundred dollars a month. For some, this led to default; for others, the result was filing for bankruptcy protection.

The majority of consumers looked for ways to reduce that debt load or to eliminate it entirely. The most popular debt management method that emerged was called the "Snowball Method".

Using a debt Snowball, consumers would pay a fixed rate each month on each ACCOUNT, rather than the falling rates that are charged as the debt is slowly paid off. ACCOUNTS would be listed with the smallest at the top of the list with no regard to interest rates being charged on various CREDIT cards. The Snowball plan is simple and consists of budgeting to allow extra money to be paid monthly on the ACCOUNT at the top of the list. This pays off that ACCOUNT in months rather than years. When the first ACCOUNT is paid in full, the money allocated for that payment is then added to the fixed payment of the second account on the list.

Clearly, as each account is paid, the amount being applied to the next debt is larger - thus the term "Snowball". The plan is simple and brilliantly workable if, and only if, the interest rates on the ACCOUNTS are similar. Proponents of the Snowball Method say it's necessary to pay off smaller debt loads first because that provides rather quick results and motivates people to keep working on that debt reduction plan.

If the interest rates are widely varied on accounts, there is little logic in paying off lower interest rates first. If you have a $2000 balance at 10% annual interest, and a $5000 balance at 21% interest, it simply makes no sense to focus on paying off the lower rate first. A much wiser method would be to provide your own motivation and apply extra funds to the higher interest cards to get rid of the high interest rates.

This is an ongoing argument between consumer credit counselors and financial management specialists and perhaps the only question to ask is which method will work for you over the long term. Using one of the snowball debt calculators available online, you can enter your personal credit information both ways and see how long it will take to become debt free. You can generate a monthly schedule of payments that clearly shows the payoff date of each debt if you follow your payment plan every month. Printing out that payment schedule and posting it on your refrigerator where you see it daily may be all the motivation you need.

The time needed to rid yourself of revolving credit debt will depend on how much extra money you find in your budget to apply to that first account to be paid off. It doesn't need to be a huge amount as $50 a month as an initial extra payment will start your snowball rolling. Printing out that payment schedule and posting it on your refrigerator where you see it daily may be all the motivation you need.