Debt Reduction : Snowball Your Debt

Many have asked the hubby and I how we got out of our credit card debt, especially those that are finding themselves in the same situation. The economy is down and is affecting everyone even if only when they look at their 401k or grocery bill.

There are several ways you can cut back on the amount of money you spend, and while you will have to make some choices on how you spend, this article isn’t really about cutting back. If you are making the minimum payments on your credit cards and have only five extra dollars a month then you can use the debt reduction method to snowball your debt.

This method is also often referred to as the Dave Ramsey plan of debt reduction. I had only heard it referred to as the snowball debt plan but have since learned that it is the same plan Dave Ramsey sells with his books, cd’s and seminars.

Before I go any further, let me make this clear, we did not pay anyone to help us pay off our debt. We did not purchase any books, DVD’s. We did not use a non-profit debt consolidation company (if a debt consolidation company is asking for your money to help you it is a scam). We got ourselves out of debt without any help.

You may want to start with The Frugal Home bio.

Snowball Your Debt with this Debt Reduction Plan

Be Honest With Yourself

You cannot get out of debt without being honest with yourself. This means going through all of your debt, no matter how small or seemingly insignificant and not pretending the really big stuff doesn’t exist.

Make a List and Get Your Credit Report

Get a copy of your credit report in case you have missed anything and to see what it shows. You can get a free copy of all three of your credit reports at www.annualcreditreport.com. Make sure you haven’t missed anything and look for errors. Dispute any information that is not yours or is wrong and ask that it be taken off of your credit report.

Make a list of all of your debt with the name, amount, interest, and type of debt.

The Two Snowball Debt Options

There are two options to using a snowball to get yourself out of debt. Option One involves the interest you are paying and will save you money over the long run while Option Two, which involves the balances of your debt, can be psychologically rewarding and can help you stay focused.

Option 2 : We used the psychological approach of the snowball debt reduction when we paid off the $11,000 in credit card debt we previously owed.

Make a list of all of your debt beginning with the smallest balance to the largest balance along with the minimum payment for each one. Every month send the minimum payment to each card. Take any extra money you have, even if it is only five dollars, and send it to the lowest balance credit card. Continue this until you have paid off the lowest balance credit card. Once you have paid off the lowest balance card take its minimum payment plus any extra you were sending it and send all of that two the second lowest credit card along with its minimum payment until you have paid it off. Repeat until all of your debt is paid off.

Do you see the debt reduction snowball and how the amount of money you are sending each card is snowballing into greater amounts which helps you pay off your debt quicker?

Option 1 : Using your interest rates to snowball your debt can save you more money than beginning with your balances but for some can cause them to give up earlier if their highest interest rate card also has an extremely high balance. While we didn’t use this debt reduction snowball at first we are currently using it to pay off our home/student loan/auto debts.

Make a list of all of your debt beginning with the highest interest rate debt down to the lowest interest rate debt. This works the same as Option 2 except you are paying off your highest interest rate first and using your debt snowball to work your way down to your lowest interest rate debt.

Remember there is no quick fix. This could take you several years to pull out of but the feeling you will get when you make that last payment will be well worth what it took to get there!

Have you used the snowball method of debt reduction? Leave a comment or share your entire story by becoming a Frugal Home Contributor.