Credit Card Snowball Effect and How to beat it
Americans have on average three credit cards per household carrying a combined balance of nearly 12,000 thousand dollars and most are just paying the minimum payment due.
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?
Who wouldn't want to achieve debt elimination? No one! Credit cards grow at an exponential rate. What if you could turn this credit card snowball effect to your advantage?
Let's take a closer look at a snowball. You start small and soon after rolling over and over they can build massive. Does that sound a little too familiar with your credit? Apply the credit card snowball effect in the positive way and you'll see it works.
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.
Debt elimination becomes more and more difficult when you carry balances on your credit card. The credit card snowball effect in the negative is a compilation of compound interest. Therefore, the idea is to use this same effect to your advantage.
Gather all your credit card statements.
Choose the one with the highest interest rate
Add extra money each month to the card with the highest rate until it is paid off.
Repeat this process for all of your cards as you pay them off.
Sounds like good advice doesn't it? On the surface, this is a great debt elimination exercise and eventually it will work. However there are times and situation where this is not the correct way to reverse the credit card snowball effect.
Interest rates will vary from one card to the next. Some will be extremely high and some will have lower introductory rates. All things being equal paying off the highest interest rate would sound reasonable, nevertheless consider the example below.
For the sake of argument, lets say that you have two cards with different interest rates. Let us further assume that the interest rates are ten and twenty percent respectively. Choosing which one to pay will depend on the balance on each. If your 10% card is caring a large balance then your monthly interest accrual will be higher than the larger interest rate.
The above example just goes to show that higher interest is not always the enemy of your debt elimination. The credit card snowball effect will quickly take your balance to new heights. Particularly if you are only making the minimum, payment required.
A better way of attacking this situation is to turn the credit card snowball effect in your favor:
Create a list of all your credit cards and their rates.
Start with the one that accrues the highest interest every month.
Begin concentrating all the extra money you can toward that credit card.
Keep all other cards at minimum to free up cash to pay off the first card.
Rinse, lather and repeat for all the cards in your wallet.
Looking at it, this way it is easy to see that this will be the fastest road to debt elimination. It is important to always consider financial issues from many angles. This is doubly true with credit cards.
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?
Who wouldn't want to achieve debt elimination? No one! Credit cards grow at an exponential rate. What if you could turn this credit card snowball effect to your advantage?
Let's take a closer look at a snowball. You start small and soon after rolling over and over they can build massive. Does that sound a little too familiar with your credit? Apply the credit card snowball effect in the positive way and you'll see it works.
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.
Debt elimination becomes more and more difficult when you carry balances on your credit card. The credit card snowball effect in the negative is a compilation of compound interest. Therefore, the idea is to use this same effect to your advantage.
Gather all your credit card statements.
Choose the one with the highest interest rate
Add extra money each month to the card with the highest rate until it is paid off.
Repeat this process for all of your cards as you pay them off.
Sounds like good advice doesn't it? On the surface, this is a great debt elimination exercise and eventually it will work. However there are times and situation where this is not the correct way to reverse the credit card snowball effect.
Interest rates will vary from one card to the next. Some will be extremely high and some will have lower introductory rates. All things being equal paying off the highest interest rate would sound reasonable, nevertheless consider the example below.
For the sake of argument, lets say that you have two cards with different interest rates. Let us further assume that the interest rates are ten and twenty percent respectively. Choosing which one to pay will depend on the balance on each. If your 10% card is caring a large balance then your monthly interest accrual will be higher than the larger interest rate.
The above example just goes to show that higher interest is not always the enemy of your debt elimination. The credit card snowball effect will quickly take your balance to new heights. Particularly if you are only making the minimum, payment required.
A better way of attacking this situation is to turn the credit card snowball effect in your favor:
Create a list of all your credit cards and their rates.
Start with the one that accrues the highest interest every month.
Begin concentrating all the extra money you can toward that credit card.
Keep all other cards at minimum to free up cash to pay off the first card.
Rinse, lather and repeat for all the cards in your wallet.
Looking at it, this way it is easy to see that this will be the fastest road to debt elimination. It is important to always consider financial issues from many angles. This is doubly true with credit cards.
About the Author:
Philip Crafton is an expert in managing credit, he has over four years experience in the finance and credit industry. Check out the latest credit offers at www.Credit-In-Minutes.com. Copyright 2008 credit-in-minutes.com
posted by Debt Consolidation Loan at
5:27 AM
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