I have been a member of the Dave Ramsey Total Money Makeover forums for over two years now, and in that time I’ve made several virtual friends, and read many inspiring stories of families who clawed their way out of debt.
I recently read a comment from a new member working their way through baby step two–the dreaded debt snowball. One of the things the new member was struggling with was resisting the temptation to make more than the minimum payment on all her debt accounts.
Generally Speaking, More is Better
When it comes to credit card minimum payments, most financial experts agree more is better. In fact, some go as far as suggesting that cardholders try to make double the minimum payment to lessen the time they are in debt, and reduce the amount of interest they are charged.
Financially, this makes perfect sense. However, by spreading out your available dollars across several cards you are effectively only reducing each card’s balance a small amount.
Before getting started, it makes sense to get as much debt as possible to the lowest possible rate. This way, your payments will make more of a dent.
Pay More Only On One Card
The main idea behind the debt snowball is paying only the minimum payments on ALL of your debts, and throwing any additional money at the smallest debt. For example, if you owed $5,000 across five credit cards, your total minimum payments might be around $100 per month ($20 per card).
Now let’s assume you are living frugal, and/or earning extra money, and can apply $500 towards debt repayment. If you split that amount equally across all five accounts you would only reduce each card’s balance by $100 per month (minus accrued interest).
Under the debt snowball plan minimum payments would be made on all but the card with the lowest balance ($80), and the remaining $420 would be paid towards that smallest card. Depending on the size of the starting balance, $420 can bring a credit card balance to zero fairly quickly. When that card is paid off you will only be making three $20 minimum payments and the remaining $440 snowball payment will be applied to the next smallest card, and so on.
The idea of paying more than the minimum payment has been reinforced since the early days of revolving charge accounts, and it is an effective way to pay off debt faster. However, if you have several debt accounts it might make sense to focus your efforts on paying one debt at a time, while maintaining a current status on other accounts by only making the minimum payments.
If you can only make the bare minimum payments on your credit cards that can be incredibly expensive over time. But using a weak credit card can be even more costly. Research and compare some credit cards that will go a long way in helping you to save on those outrageously expensive finance charges. Also, if you like to travel but are having a hard time saving money on your vacations, you should consider some of the better frequent flyer credit cards that you can easily find online.