Pay off your debt with the snowball method


Debt. That four-letter word that sends shivers down our spines. Like freshly fallen snow, debt begins as tiny snowflakes, slowly building up over time. But as your debts compound, especially credit card balances with high percentage rates, loans, and revolving accounts, that accumulating mound of snow can quickly turn into a crushing avalanche of credit nightmares.

How can you shovel your way clear of a mountain of debt? It takes a plan, a commitment to dig yourself out, and the focused discipline to realize your goal. Below are tips to follow that can return you to financial freedom.

Organize your debts

To understand what you’re up against, assemble all your bank, credit card, loan, and other monthly statements. It’s a good idea to contact Experian, Equifax, and TransUnion, the three major credit reporting agencies, to request a free copy of your credit reports. You can do this at no cost via (a service owned by the three agencies).

Having these credit reports will help you identify all of your creditors and the outstanding amounts due on your debts. (Note: Your credit reports won’t show some debts such as loans from family members or friends, or some medical bills, so be sure to research these and include them.) In addition, you can purchase a copy of your FICO credit scores from each credit bureau, but there are other sources that can provide these, including your bank.

If you have a student loan, visit the National Student Loan Data System (NSLDS), the U.S. Department of Education’s (ED) central database for federal student aid, to look up your outstanding loan information.

With all this in front of you, it’s time to make a list. A pencil and paper are all you need, but an electronic spreadsheet like Microsoft Excel, Google Sheets, or Apple Numbers gives you more power and flexibility to monitor your progress. A great alternative is a personal financial management app like Quicken for Windows and Mac computers, or Mint, a popular money management and bill tracking app for iOS and Android devices.

It’s time for your homework. Fill in your list with all of your debts. Across the top of your list or spreadsheet, create columns for the names of creditors, interest rate, outstanding balance, and your minimum monthly payment. Each row will represent a creditor. Be sure to list the amount you will need to pay off the debt for each of your credit cards within three years. You can often find this on your credit card statement.

Once you have done all this, you can determine your total outstanding debt and your total monthly payments. It’s important because you will need this in order to set a budget and determine your debt repayment strategy.

Call your creditors and negotiate

If you have questions about the amount of debt you owe each creditor or the interest rate they charge, call their representative. They should be interested in helping you with the details you need and be a partner in zeroing out what you owe. While you’re on the phone, it’s a good time to try to negotiate a lower interest rate. By knowing the details of what you owe, and your FICO credit score, along with your payment history (if you always pay your bills on time, that puts you in a much stronger position), you may be able to politely sweet talk the representative into helping you with a lower interest rate.

Plan your strategy and budget

Now that you know your total debt and your total monthly payments, you can determine whether you’re knee deep in snow or up to your eyeballs.* (Hopefully not.) With these two key numbers, you can craft a plan of the monthly payments that you can afford to make to pay off your total debts.

To do this, a key part of your debt repayment strategy is preparing a budget of your income and expenses. Be sure to include your monthly income and regular expenses including groceries, utilities, gas, maintenance, health, insurance, and entertainment.

Why is this important? Because a budget is your roadmap to digging out from debt in the shortest amount of time. Your budget will help determine whether you have a monthly cash surplus, or if you are in the red, a deficit. Apply every surplus penny to the goal of erasing your debt.

Paying down your debts will require some sacrifices and hard choices. If you have your eye on some flashy new clothes, a night on the town, a weekend in the mountains, or a shiny new phone, this is where you will need to separate needs from wants. Anything you absolutely don’t need should be used to pay off your debts instead. You can also earn extra cash to help maintain your lifestyle while accelerating the payoff of your debt. Volunteer to work extra hours or take a second job. That might not sound glamorous but neither does being buried under an avalanche of debt.

Build your snowball

Now that you know your debts, set a budget, and create a strategy for how you will pay off what you owe, it’s time to put your plan into action. We recommend the Snowball Method. It’s called a snowball because you will target one particular creditor at a time, and focus much of your available funds on eliminating that debt. You’re building a snowball to get yourself out from being buried in that avalanche of debt.

To do this, go to your list or spreadsheet and rank your debts from the smallest to the biggest amounts due. Then, start with the creditor with the smallest amount due. Minimize your payments to the other creditors so that you can put more money toward paying off the first targeted creditor. When that debt has been paid off, you will move on to the next creditor on the list and repeat the process.

The reason for starting with the smallest creditor first is purely psychological. You can also go the opposite direction, starting with the credit card or loan that has the highest interest rate or outstanding amount due. Then, move to the creditor charging the next highest interest rate or amount due, and so on. While that is mathematically faster to pay everything off, it’s often more emotionally challenging.

Either way, every time you pay off a creditor, it’s a cause for celebration and will motivate you to build your snowball of debt repayment. With every creditor you pay off, the easier this will feel for you to accomplish, and the faster your snowball will roll. In as little as two to three years, you can gain financial freedom from the chains that bind you.

In the process, you will gain a sense of financial discipline and better habits than you have ever had. It’s very important to look at your bills weekly and especially pay your bills on time. If you do, your creditors will be much more willing to work with you in paying everything off.

Knowledge is power. It’s a good idea to learn about how credit and the all-important FICO credit scores work. We recommend visiting the free education sections of the website and the debt management tutorials from Experian. They are excellent resources, helping you be smarter about managing your credit and intelligently paying off what you owe.

Two pro tips that will help your credit rating (and FICO scores) along with your sanity:

  1. Do not close an account once the balance is paid off. Surprisingly, this can actually damage your credit and lower your FICO score. Cut up or put away your credit card but don’t close the account. Instead, let the account balance remain at $0. 
  2. If you are getting calls from bill collectors, don’t try to negotiate with them. Typically, they have no authority to change the terms of what you owe. Usually, bill collectors are third parties paid a commission to push you to pay off what you owe. They don’t care about your plight. Instead, contact the creditor directly and negotiate with them. By showing you are prioritizing paying what you owe them, and especially by paying your bills on time, the creditor is more likely to help you.

* Depending on the depth of your debts, you may need to consider alternate strategies including shifting debts to a lower interest rate credit card, working with a credit counselor/consolidator, or if necessary, meeting with a bankruptcy attorney.

Consulting with the accounting team at Ross-Stern & Associates is a wise course of action. We can work with you by reviewing your situation, developing a debt reduction strategy, and helping you stay on track to meet your goal of financial independence. Contact us today or call 818.776.0399 to get started building your snowball.