There are many ways to pay down your credit card debt. Over the course of the next few weeks, I am going to share the different methods espoused by the various financial experts out there. Today, I’ll explore the system that helped reduce my account balance to zero: Dave Ramsey’s Debt Snowball.
Write Down All of Your Debt List out your amount of outstanding debt. List it all out. Write it all down. Your student loans, your car loan, credit card debt, the money you owe your parents or your family, your mortgage. Everything should be listed. Don’t leave a single debt off your list.
Start Paying Down Debt As you begin paying down your debt, it is important that you are current in all of your payments and that you continue to make all the necessary minimum payments. Now, list out your debts from lowest outstanding amount to highest outstanding amount owed. It’s almost counter-intuitive, but you are going to start with the lowest amount owed first. Disregard interest rates. Disregard rationale for a moment. Throw all your extra money that you have at the lowest bill. Keep knocking it down, little-by-little. In no time, that debt will be eliminated. Next, take all the money that you had used to pay off the lowest amount and apply it to whatever bill is the next lowest amount. As you knock off your debt, you keep applying higher and higher sums of money to your debt. Effectively causing what Dave Ramsey has called a “debt snowball.”
For those of you who have outstanding debt owed to various sources, this approach may be helpful in that it provides the emotional satisfaction of eliminating individual debts more quickly. But, if you can’t justify paying off a $200 debt to your mom with no interest before you attack your $9,000 credit card debt at 15% APR, then this approach may not be the best approach for you. I’ll get to other theories on the best way to eliminate/reduce debt in the upcoming weeks.
The Debt Snowball belongs to Dave Ramsey, a syndicated radio host and the author of many books, including the Total Money Makeover. If you are interested in a learning more about Dave’s appraoch to getting out of debt and getting your financial life in order, I recommend you read his book.