In a previous post I talked about the top 10 reasons to pay down your debt. I’ve also talked about the best (and cheapest) way to do that. However, it occurred to me that perhaps there’s more of a psychological barrier to American debt and there may be other ways to approach a repayment plan. There’s been a lot of buzz around the Debt Snowball approach, so I thought we’d talk a little about that in comparison to the traditional method. 

It’s no secret that humans are psychologically complex creatures. We know what we’re supposed to do in relation to our debt, but sometimes it’s just not that easy to make the right decisions. If it were simple, we wouldn’t have an average of 10 credit cards with over $20,000 in debt! Some of you reading this may not have quite that much, but there are plenty of people out there who do. So what do you do when you have that much debt?

If you’re of the traditional sort, then you may prefer to minimize your interest payments and save yourself a little more money in the long run. If that’s the case, your repayment plan may look a little something like this:

• Put your debts in order from highest INTEREST rate to lowest INTEREST rate

• Budget an amount that you can realistically apply to your debt every month

• Make minimum payments on your lower interest cards every month and then apply the remaining budgeted amount to the highest interest rate

• Apply any extra money that you can to the highest interest card until paid off

• When the debt has been repaid, move to the next card without changing the amounts being paid out

This traditional method is talked about by every financial expert there is and many bankers – like me – have given the same advice. The trouble is, this method is slow and requires patience, perseverance, and discipline. Many people who have a large amount of debt on that high interest credit card feel defeated when they don’t see an immediate end in sight. No one said it would be easy to get it done, but if you’re willing, this method can unarguably save you the most money.

However, some people are more results-driven and prefer to see immediate and tangible results. For these people, the psychological boost that comes with paying off a debt could be the push they need to keep going. Thus, the Debt Snowball method was born. It works like so:

• Put your debts in order from lowest BALANCE to highest BALANCE

• Budget an amount that you can realistically apply to your debt every month

• Make minimum payments on your higher balance cards every month and then apply the remaining budgeted amount to the smallest balance

• Apply any extra money you can to the smallest balance card until paid off

• When the debt has been repaid, move to the next card without changing the amounts being paid out

A Word (or two) of Caution: This method will give you quicker results, but sometimes quicker isn’t always better. If you have a spending problem you’re more likely to just run those smaller credit cards up again. If that happens, you may feel as though you’ve made no progress and then you’re back to square one. However, if done properly, this approach could be very beneficial for some. If you decide to use this method, do yourself a favor and cut up or hide the cards that you’ve paid off – this way, you’re not tempted to use them.

The Debt Snowball method is, according to creator Dave Ramsey, “behavior modification over math.” Yes, the traditional method makes the most sense financially, but it requires the discipline to see it through. The Debt Snowball method uses positive, psychological re-enforcement to help consumers get their debts paid in full.

Admittedly, as an individual in the banking industry, I’m against the Debt Snowball method only because it doesn’t necessarily change spending habits and it costs more over time. I like the idea of psychological re-enforcement, but I have a hard time recommending to people that they should pay more money. With the traditional method, the time and effort it takes to pay it down is incentive NOT to run those cards up again. However, paying down your debt is the goal and you have to do what is most comfortable for you. If the Debt Snowball method works for you, great – keep up the good work! If not, try the traditional method. It’s a slower process, but maybe that’s what you need to really focus on your priorities.

I’m curious to everyone else’s thoughts on this, though. Let’s discuss!

Related posts:

1. A Primer: Secured Credit Cards
2. 10 Tips for Seniors to Get Out of Debt
3. Bi-Monthly Credit Card Payments
4. How I Got Out of Debt: Part III
5. Credit Counseling Services: A Primer