Credit Card Snowball Effect and How to beat it

By Philip Crafton

If you are like millions of other people on the planet, you likely have at least three credit cards with balances of ten to twelve thousand dollars. In addition, you are probably still only paying the minimum payment.

As everyone knows that plan will take you, no where on the path to debt elimination. You will simply sit and spin your wheels hoping that you win the lottery so you can pay off these balances. What if there was a better way?

Using what is known as the credit card snowball effect you can pay down then pay off all of your credit cards. Currently you are floating along only doing the minimum, this way you take an active role in your debt elimination.

You know what that is, right? Just like a snowball, you roll up in the backyard, credit cards will build up a balance seemingly in moments. As a consumer, you have two choices, get smashed by the credit card snowball effect or turn it around and make it work for you.

Snowballing your credit card balance to achieve debt elimination is not difficult. You take a little each month and add to what you are already paying. You take the balance down faster and therefore the interest you pay, which in turn grows the amount of your next payment that goes toward principle, this is the credit card snowball effect.

There are many people who will tell you to pay off the card with the highest interest rate first. This is what that plan will look like:

List all your credit cards

Put them in order according to interest rate percentage.

Pay as much extra as you can each month on the one with the largest interest rate.

Do this over again for each succeeding credit card until you have eliminated them all.

At first, the glance this seems like a reasonable plan for debt elimination. However, this is not always the best course of action.

All of your credit cards have different balances and interest rates. It would only seem to make sense to pay off the highest interest first. Nevertheless, consider these numbers.

For example, let us say you have three credit cards with interest ranging from 5% to 20%. Now assume that one of the cards has a $5,000 balance at 10% interest, which is fifty dollars per month in interest. The highest interest rate you have, 20% is on a card with a $2,000 balance, equaling forty dollars per month in interest.

As you can see in the above example this is a time that conventional wisdom does not apply. Fifty dollars a month will soon balloon the balance on that card even though it is the lowest rate in your wallet. Especially if you are making only the minimum payment.

Let's take another look of how to use the credit card snowball effect to your advantage:

Create a list of all your credit cards and their rates.

Choose the one with the highest interest accrual each month.

Add extra payments to this card until the balance is zero.

Keep all other cards at minimum to free up cash to pay off the first card.

Repeat this process until all cards are paid off.

Sometimes a debt elimination plan means looking at things with a new perspective. This way of using the credit card snowball effect will have you free of your debt woes in no time.

About the Author:

Philip Crafton is an expert in managing credit, he has mutilple years of experience in the financial industry. Find reward credit cards, 0% balance transfers and even credit reports at www.Credit-In-Minutes.com. Copyright 2008 credit-in-minutes.com