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Debt Snowballs

Indeed, the use, and more to the point, the misuse of debt can lead to a snowball effect. The new charges and the interest piling up and getting out of control, like a snowball about to trigger an avalanche. But author Dave Ramsey using the expression debt snowball to refer to his methodology to eliminate debt. He suggests lining up your credit cards by balance and making the minimum payment on all but the last one, the one with the lowest balance. That would pay off the lowest balance cards first, freeing up their entire payment for the next card in line. I like the advice to eliminate one’s debt, but I’d suggest lining those cards up by rate. An extra $1000 against the highest rate card may save you $240 per year in interest or more. But against that last teaser rate card you got, 4% for 18 months, just $40 the first year. Any argument I see in favor of Dave’s priority suggests that there’s a good feeling to knock off the debt from one card and count down the cards. Me, I’d rather keep a spreadsheet, or notebook, showing each balance along with the interest charged each year. The half of the money at the highest rates can easily have total interest of twice the bottom half. Pay those cards and see the real snowball effect. And see this example, let me know if you disagree.
JOE

  • JAL December 20, 2007, 9:00 pm

    Joe,

    Microsoft Money incorporates a “Debt Reduction Planner” function which creates a path to eilminate debt based on paying off the highest interest rate loan first. This makes financial sense.

    But, human nature being what it is, I can understand why some financial experts might suggest paying off the lowest debt first.

    Happy holidays,

    JAL

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