I am sure that you have always heard from the "financial gurus" that you need to pay off your credit card with the highest interest rate first and then work your way on down. It sounds pretty logical and correct, right?
Well, take a look at a little scenario with me...
You have 3 credit cards that you are trying to pay off
balance = $4,500
interest rate = 6%
balance = $800
interest rate = 12%
CC # 3
balance = $12,000
interest rate = 21%
If you look at this logically you would say "of course pay off the card with 21% interest first!
Let's say you start putting your extra $400 a month towards your CC #3 and you keep this up for 3 months...you will still owe close to $11,000 due to the interest! How does your 3 months of hard work look when you knocked off a measly $1,000 on a $12,000 balance!
Now let's try a different scenario...
THE DEBT SNOWBALL!!
See how much fun they're having ;-)
The principal to Dave Ramsey's Debt Snowball is that you pay off the card with the lowest balance first, regardless of the interest rate.
So back to our original example...
Instead of paying that extra $400 a month you have towards the $12,000 card you start with your lowest balance (CC # 2). After a little over 2 months (due to interest) you have paid that card completely off and can check it off your list! Guess what? On month #3 you have your normal $400 + your minimum payment on CC #1 (say $100) to put towards credit card #1!
Then once CC#1 is paid off you have $500 plus CC#3's minimum payment to put towards your $12,000 balance! That is what I am talking about when I say a debt snowball baby!!
Do you think you would have more motivation crossing cards off a list or watching a large balance slowly decrease? I know what feels like progress for me!