Learn How to Snowball Your Way Out of Debt

Hand erasing the word debt from chalkboard

Paying off credit cards systematically could get you out of debt faster.

You’ve been faithfully paying on your credit cards for years, but you still haven’t made a dent. Maybe you’ve thought about contacting a credit counselor or debt settlement agency to negotiate lower payments. But these third-party solutions can carry high fees. Instead, putting your own low balance or high interest repayment plan in place is a simple, affordable and effective way to pay down credit card debt more quickly. These plans allow you to “snowball” your payments, paying off one card or loan and then applying that payment—along with the existing payment—to the next debt you’re paying off.

Of course, one of your first steps may be to consolidate your credit card debt. You might be able to get a new card with a lower annual percentage rate, which you can use to pay off all of your existing credit cards. Then, you’ll be able to apply one of the snowball techniques even more effectively—and save yourself some interest payments, too.

Snowball: Pay off the credit card with the lowest balance first.
The debt snowball repayment method requires you to make minimum payments on all of your credit cards every month, and add a little extra to the card with the lowest balance. Let’s say, for example, that you have two credit cards. One card carries a balance of $2,500 with a $100 minimum payment and the other a balance of $1,000 with a $75 minimum payment. If you pay the minimum on each card, and add an extra $25 per month to the payment for the $1,000 balance, you’ll accelerate the payoff. The “snowball” effect of this debt repayment method kicks in once the smallest debt is eliminated, because you’ll then apply that entire payment to the other debt—in this case, doubling your payment from $100 to $200.

Psychologically, this method makes sense because you’ll see progress sooner and be motivated to continue tackling your debt card by card. But what if you have several cards with similar minimum payments? Trent Hamm of the Simple Dollar financial blog suggests paying off higher-interest rate debt first because “it simply puts more cash in your pocket at the end.”

High-Interest Snowball: Focus on paying off the credit card with the highest interest rate.
In our previous example, let’s say the card with the $2,500 balance has an annual percentage rate (APR) of 19 percent, and the APR for the card with the $1,000 balance is 13 percent. Hamm and others advocate putting extra cash toward the card with the higher APR so that you’ll end up paying less interest over time.

Either repayment method puts a future free of credit card debt within reach. Explore both options by using free debt calculator tools like the debt snowball tool at What’s the Cost.com or the reduce credit card debt calculators at Nationwide.com.

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