Radio talk show host Dave Ramsey promotes a Debt Snowball Plan to payoff credit card debt. Paying off credit card debt fast is important. Understanding the Snowball Plan will help in deciding the best way to lower debt and pay off credit cards. The interest rate on each credit card is an important consideration.
The Dave Ramsey approach to paying down credit card debt is to pay the most possible to the credit card with the lowest balance, and then pay just the minimum required monthly payment on all the others. The credit card interest rate is not considered by Dave Ramsey.
According to Dave Ramsey, once the credit card with the lowest balance is paid in full, add what was being paid to the first credit card to the one with the next lowest balance. The other credit cards with higher balances are paid only the minimum monthly payment required.
This process endorsed by Dave Ramsey will eventually pay down credit card debt. The interest rate being charged is a critical part of the formula. While payments are being made against the credit card with the lowest balance, the others continue to accrue interest.
The mathematical controversy with the Dave Ramsey Debt Snowball Plan is that the overall amount of interest being paid continues each month. The total amount of money being paid each month towards interest does nothing to lower the principal and payoff the credit cards.
The alternative solution to paying off credit card debt faster is to make the largest payments against the credit card with the highest interest rate. The credit cards with lower interest rates are paid only the minimum monthly payments. Managing interest rates can reduce credit card debt faster.
There is also a psychological aspect to this discussion. The apparent advantage that Dave Ramsey claims is the positive emotions gained by paying off a credit card quickly. The Debt Snowball Plan acclaimed by Dave Ramsey assumes there is some level of motivation resulting from paying off a credit card. The Snowball continues to grow as the first payment is then applied to the next credit card.
A disciplined approached to pay off credit cards with the highest interest rate is mathematically superior to the Dave Ramsey Snowball plan. Understanding interest rates will allow credit card debt to be reduced faster. Reducing the amount of money financed at a higher interest rate allows more of the same money to be applied against principal, which reduces the overall amount of time required to pay off a credit card.
The Debt Snowball Plan endorsed by Dave Ramsey is based on the psychological gain that motivates continued payments. This plan definitely works to pay down debt. Based strictly on math, the best approach is to make higher payments against the credit card debt with the highest interest rates.