Is one of your financial New Year’s Resolutions to get out of credit card debt? Then maybe you’ve heard of the “snowball method” associated with personal finance expert Dave Ramsey. It won’t be the best debt reduction strategy for everyone, and maybe not even for you, but let’s talk about it. Today we’ll give you a simple explanation and example to help you figure out if the snowball method can really help you eliminate your credit card debt.

What is the Snowball Method of Debt Reduction?

Basically, this method just means you pay off your lowest balance debt first. When that debt is paid off, you would put the payment from that card towards the card with the next highest balance.

To make this work, you must be able to afford at least the minimum payment due on every credit card or loan. But you really should have even more than that. For example, let’s say you usually pay a bit more than your minimum due on all debts. But you don’t feel like you’re getting anywhere. Those extra payments total $250 per month. Instead of splitting them up, you would put all of that each month towards the lowest balance card until it’s paid off.

An Example of Snowball Effect Debt Reduction

Using the information above, let’s assume you have the following credit card debt totalling $5,000:

•    Card A – $250 – $25 per month minimum payment
•    Card B – $1250 – $50 per month minimum payment
•    Card C – $1500 – $75 per month minimum payment
•    Card D – $2000 – $100 per month minimum payment

You also have the $250 extra per month that you can put towards your debts, as we mentioned earlier. To take advantage of the snowball effect you would pay the minimum on all cards the first month, but also pay the $250 towards Card A. That means after your first months’ payment your Card A would be completely paid off (plus you’d have another $25 to put towards Card B).

In the second month you would still pay the minimum due on Cards B, C, and D. The extra $250 would now go towards Card B every month on top of the minimum payment until it’s paid off. But that’s not all. You would also key paying Card A’s minimum payment every month — but adding it to that $250 extra. So in the second month that means Card B would get $50 for the minimum fee, plus the $250 extra, plus the $25 that usually went to pay down Card A’s balance — $325 per month.

Every time a card is paid off, more money goes towards the next card in your list, creating a snowball effect. The concept isn’t perfect though. You could save money on interest by tackling the cards with the highest interest rates first instead. But be realistic. If that were enough to motivate you, you probably would have already paid off the debts to save on interest in general. The reason the snowball method works for some people is that it has a motivation factor. You pay off cards quickly, and paying off one can motivate you to stick with the plan to pay off another. Like with any debt reduction plan, figure out whether or not the snowball method is realistic for you. If you have the discipline to tackle higher interest cards first, go for it. Or maybe you’ll find another plan altogether. The only thing that really matters is that you do what you need to do to get out of credit card debt. Oh, and remember this. The snowball effect can’t work if you don’t stop buying on credit. To decrease your debt, the first step is to stop adding to it.