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If you are feeling burdened by the debt of credit card bills, then the 'Debt Snowball' method can prove to be a lifeline for you. It shows you a clear path. Here's how you can reduce the burden of debt with its help.

The habit of 'swiping' a credit card seems very convenient. But if it is not used carefully, it does not take long to get caught in the debt trap. Credit card debt is such a labyrinth that once a person gets trapped in it, it is very difficult to get out. Its heavy interest eats up a large part of your income, and you sink deeper into the debt trap by paying only the minimum amount due. If you are also stuck in credit card debt and want to get rid of it as soon as possible, then there is a very effective and powerful method, which is called the 'Debt Snowball' method. Know about it.

What is the 'Debt Snowball' method?

The 'Debt Snowball' method was made popular by financial expert Dave Ramsey. Its principle is based more on psychology than mathematics. Just like when a small snowball rolls down a mountain, it becomes bigger and more powerful by wrapping more snow around itself; this method works in the same way.

In this method, you arrange all your debts (such as 2-3 credit card bills) not according to their interest rate, but according to their outstanding balance, from smallest to largest. Then you put all your strength into eliminating the smallest debt, while making only the minimum payment on the rest of the debts. As soon as the smallest debt is over, you apply the entire EMI of that debt to the next smallest debt. This process continues until your last and largest debt is also over.

Let's understand this with an example

Suppose you have debt on three credit cards and you can withdraw an additional ₹5,000 every month to repay the debt.

Step 1: Target the smallest debt

You will sort all your debts from smallest to largest: Card A (15k) -> Card B (40k) -> Card C (80k).

Your first target is card A.

You will pay the minimum payment on card A (₹750) + additional amount (₹5,000) = ₹5,750.

On cards B and C, you will make only their minimum payments (₹2,000 and ₹4,000).

This way, your smallest debt of ₹15,000 will be gone in a few months.

Step 2: Now 'snowball' the payments

As soon as the debt on card A becomes zero, you will feel a lot of relief.

Now transfer the ₹5,750 you were paying on card A to the next smallest debt, i.e. card B.

Now you will pay its minimum payment on card B (₹2,000) + the amount freed from card A (₹5,750) = ₹7,750 every month. On card C, you will still make only the minimum payment (₹4,000).

Step 3: The last and the biggest debt

With the increased payment, card B will also be gone soon.

Now you will transfer the entire amount being paid on card B (₹7,750) to card C. Now you will pay the minimum payment on card C (₹4,000) + the snowballed amount (₹7,750) = ₹11,750 every month.

You can see for yourself how quickly the debt that seemed impossible earlier will be eliminated in the face of this increased payment.

Why is the 'Debt Snowball' method so effective?

Mathematically speaking, there is another method called 'Debt Avalanche', in which the debt with the highest interest is paid off first and you can save a little more money on interest. But personal finance is not just mathematics, it is also behaviour and psychology. The main reason why 'Debt Snowball' works is

"Psychological Win"

When you completely eliminate one of your debts in just a few months, you get a tremendous motivation. You start believing that you can do it.

This method puts you into a rhythm and habit of repaying the debt.

It is very easy to follow. You don't have to think much about different interest rates.

Frequently Asked Questions (FAQs)

1. What is the difference between 'Debt Snowball' and 'Debt Avalanche'?

In 'Debt Snowball', you pay off the debt with the lowest balance first so that you get quick motivation. Whereas in 'Debt Avalanche', you pay off the debt with the highest interest rate first, which saves you a little more interest overall, but it may take more time to get the first success.

2. Will this method affect my credit score?

No, rather it will improve your credit score. When you pay your bills on time and reduce your total debt, your Credit Utilization Ratio (CUR) improves, which increases your score.

3. What do I do if I don't have extra money?

You will have to revisit your budget. Cut down on unnecessary expenses (eating out, expensive coffee). You can also start a side hustle or part-time job to increase your income.

4. What is the first step to start this method?

The most important step is to immediately stop using all the credit cards whose debt you want to repay. Lock them in your cupboard so that you do not increase your debt.

5. Can personal loans also be included in this method?

Yes, absolutely. You can add your credit card bills, personal loans, or any other unsecured loans to your list and follow this method by arranging them from smallest to largest.

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