Credit Card Articles, Using Credit Cards - Thursday, January 24, 2008 13:08 - 0 Comments

How To Pay Off Credit Card Debt

How to pay off credit card debt using the ‘Snowball Technique’

Let’s look at a little history of the credit card. The very first credit card that could be used at more than one merchant was issued in the year 1950 by a man named Frank McNamara. Frank started the “Diner’s Club” credit card company with around two hundred (200) card holders and this was the start of that vicious cycle that many credit card holders now fall victim to: charging purchases on your credit card when you don’t actually have the money to pay for them and then struggling to keep up with the monthly payments because of the high interest rates that are associated with your account. Basically we’re talking about spending beyond your own means.

Today, the average amount of credit card debt held by a typical American is $8500. As all credit card holders know the interest on a credit card balance causes you to owe more than double the amount you’ve actually spent on the card if you only manage to send in the minimum payment and never miss or make any late payments. These numbers increase when you send in late payments thanks to the addition of “late fees.”

Some card holders attempt to play what is known as “credit roulette” to pay off their credit debt. This is where you take out a loan to pay off the debt of a credit card, or you transfer (called a balance transfer) credit card debt from one card to another, in hopes of taking advantage of a lower interest rate or promotional offer offered with the new card. This juggling act may work for a while but eventually you are doing to have difficulty getting new offers and places to transfer the debt to, some card holders have missed the fine print on one of the offers and wound up paying more interest than you initially thought actually creating a deeper hole instead of helping you get out of one.

The question is, how can an average person pay off their credit card debt without having to file for bankruptcy or joining a credit counseling service or having to get a second job?

Introducing The Snowball Technique

One of the best ways you can pay off credit card debt (and other debts as well, for that matter) is to use what’s known as the snowball technique. Much like a snowball gathers more snow and grows as it rolls down a hill your payments to creditors grow as you completely pay off one debt and apply that payment to the next debt.

You’ll need to make a list of all of your creditors, everyone you owe, in the list you’ll need to include their minimum monthly payment, the total amount you owe them, and the interest rate at which you are being charged. Take the debt that has the least amount owed and make that the first creditor you will focus on paying off completely. While you’re focusing on that debt you’ll pay the minimum amount owed on each of your other outstanding accounts, so that you can focus your payments on paying your focal creditor off completely.

Here’s an example, let’s say you have three (3) credit cards. Card one has $7,000 owed at 20% interest, and comes with a minimum payment of $80, credit card two has $5,000 owed at 18% interest and comes with a minimum monthly payment of $45, and credit card three has $2500 owed at 21% interest with and comes with a minimum monthly payment of $30. You’re going to focus on sending only the minimum payments to credit card’s one and two, while you focus on sending as much as you can afford to card three until card three it is completely paid off. In this example let’s say you can afford to send $100 to credit card number three. Once it is paid off write the company a letter and cancel the account entirely. This takes it out of your credit report as “available credit” and helps your credit score. So now you’re looking at having an additional $100 a month (because you’re not longer paying credit card one off). Now, you’ll focus on credit card two, which is now your lowest amount of debt, at this point a bit less than $5,000. The payment you send to credit card two will be $145. You had already been sending the minimum amount of $45 and now you’ll add the payment from the first card that you have paid off. See how the snowball is beginning to gather more snow?!?! Once you have paid off credit card two, you have an additional $145 each month to send to your last credit card (number three) to which you had already been sending $80. Your new payment for the last card is $225 per month - which is equal to almost three times the minimum amount due!

The snowball technique is not meant to be used as an overnight solution, but I’m sure you didn’t obtain all this debt overnight either! This is an easy method to understand and use and will get you out of debt faster and at less interest than if you just send in the minimum payment to each card every month. This also works more effectively than trying to send an additional amount of money to each account every month. Good luck!