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I disagree with the Debt Snowball debt reduction method because I believe you can and should improve your credit while you are reducing your debt. My method does that for you because you are not leaving maxed-out balances to the end. In my method, you cut your debt in half first and that improves your credit immediately. It’s like getting a double bang for your buck!

Let me show you the steps:

1. Create 6 columns on a piece of paper (horizontally works best): Column #1: Credit Card Name, #2: Balance, #3: Maximum Credit Limit, #4: Ratio of Debt to Credit, #5: Interest Rate, #6: Minimum Payment. Fill in the rows and columns with your debt information.

2. For column #4, it’s an easy calculation. Take your debt balance (column #2) divided by maximum credit limit (column #4). For example, let’s say you have debt on two credit cards, card A and card B. If you owe $4,000 on card A and it has a credit limit of $10,000 (that’s 4,000/10,000 = .4) and on card B you owe $4,000 and it has a credit limit of $5,000 (that’s 4000/5000=.8).

3. Rank the cards with the largest ratios first. In our example, you would rank card B (.8) above card A (.4).

4. Pay more on the card with the largest debt ratio (B=.8) and the minimum on the lower debt ratio card (A=.4). When you lower your credit card ratio to .5 or lower, your credit score will improve. That’s just part of the algorithm that credit card companies use.

5. Continue doing this until your debt ratio gets to .5 on your cards. It will take time to complete this, but when you have, go to the last step.

6. Go to column #5 and rank by highest interest rate. Pay more on the card with the highest interest rate, and the minimum on the rest, thereby saving yourself money by paying off higher interest rates.

Is this worth it? Yes! By paying according to the debt ratio, you will be improving your credit score as you pay off your debt which will allow you to buy a home, refinance, or buy an appreciating investment sooner so you can get your wealth building back on track!

Action Step: Create your debt chart as instructed above.

Write about your thoughts about debt in your wealth journal: Wealth Mini-Course & Journal by Linda P. Jones

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Be Wealthy & Smart,™ is a personal finance show with self-made millionaire Linda P. Jones, America’s Wealth Mentor.™ Learn how to build wealth, make money, and have financial freedom. Introduction to principles of wealth building you won’t hear about from your financial advisor. Learn how to get rich, the 6 Steps to Wealth, the Twin Pillars of Wealth Building™: Invest Like Billionaires™ and Create Your Luxury Brand™ Business.

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