Anne Has $25,000 of Credit Card Debt And Making Just Minimum Payments But She Wants to Get Out of Debt

“Dear Steve,

I am in credit card debt for $25k. I am making the minimum payments on each card, but it’s killing me. Should I focus on paying more on one card at a time and ignore the others? And then continue on the next card and so on? Or should I just continue to make the minimum payments even though I am getting no where with this method?


Dear Anne,

In order to start reducing your debt the secret is that you need to have enough money to send each month for the minimum payment plus some extra. Let’s say that all your minimum payments together equal $550 a month. If you want to start knocking down this debt then you’ll need to add an extra $100 a month on a consistent basis.

With a total of $650 a month to use towards reducing your debt you can apply the extra $100 a month above the minimum payment to either the credit card with the highest interest rate or the card with the lowest balance. Many find that by paying off the lowest balance credit cards first they get great emotional satisfaction out of eliminating some of their creditors faster.

Once the lowest balance creditor is paid off then you can roll that minimum payment plus the extra $100 to the next creditor. Using the debt snowball method will accelerate your debt elimination. The snowball method is a very effective way to get out of debt.

The basic steps in the debt snowball method are as follows:

  • List all debts in ascending order from smallest balance to largest. This is the method’s most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
  • Commit to pay the minimum payment on every debt.
  • Determine how much extra can be applied towards the smallest debt.
  • Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
  • Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.
  • Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
  • Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

The theory works as much on human psychology as it does on financial principles; by paying the smaller debts first, the individual, couple, or family sees fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.

A first home mortgage is not generally included in the debt snowball, but is instead paid off as part of one’s larger financial plan. As an example, many financial plans pay off home mortgages in a later step, along with any other debt which is equal to or greater than half of one’s annual take-home pay.

Simple Example

An example of the debt-snowball method in action is shown below.

A person has the following amounts of debt and additional funds available to pay debt (the debt is listed with the smallest balance first, as recommended by the method):

Credit Card A – $250 balance – $25/month minimum
Credit Card B – $500 balance – $26/month minimum
Car Payment – $2500 balance – $150/month minimum
Loan – $5000 balance – $200/month minimum

The person has an additional $100/month which can be devoted to repayment of debt.

Under the debt-snowball method, payments for the first two months would be made to debtors as follows:

Credit Card A – $125 ($25/month minimum + $100 additional available)
Credit Card B – $26/month minimum
Car Payment – $150/month minimum
Loan – $200/month minimum

After two months (presuming the person has not added to the balances, which would defeat the purpose of debt reduction), Credit Card A would be paid in full, and the remaining balances as follows:

Credit Card B – $448
Car Payment – $2200
Loan – $4600

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The person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:
Credit Card B – $151 ($26/month minimum + $125 additional available)
Car Payment – $150/month minimum
Loan – $200/month minimum

After three months Credit Card B would be paid in full (the final payment would be $146), and the remaining balances would be as follows:

Car Payment – $1750
Loan – $4000
The person would then take the $151 previously used to pay off Credit Card B and apply it as additional payment to the car loan balance, which would make payments as follows:
Car Payment – $301 ($150/month minimum + $151 additional available)
Loan – $200/month minimum

It would take six months to pay the car loan (the final payment being $245), whereupon the person would then make payments of $501/month toward the loan (which would have a $2800 balance) for six months (with the last payment at $295).
Thus in 15 months the person has repaid four loans, with two of them being paid in a mere five months and three within one year.

The primary benefit of the smallest-balance plan is the psychological benefit of seeing results sooner.

People with more financial discipline can get ahead quicker by paying off the credit cards and loans with the higher interest rates first. This will minimize costs to become debt-free faster than the smallest-balance approach.

The Debt-Snowball method is only for those on high enough incomes to be able to meet all the minimum repayment requirements on their debts. This method could instead lead to problems for those who are struggling to meet these minimum payments demands. In this circumstance, an individual should not be advised to pay creditors differing amounts as this could count as non-equitable repayment, leading to problems (e.g. with going bankrupt, or with maintaining non-equitable repayments over longer periods).

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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