One of the biggest arguments in paying down credit card debt centers around the order that you should use when paying off your credit cards. Most personal finance experts agree that you should use a specific method of debt payment. This method of debt pay down involves ordering your debts, and then figuring out how much you can pay on top of the minimum. Then, you take that amount of money, and apply it to one credit card.
If you have a credit card with a minimum payment of $25, and you can afford to pay an extra $200 a month, your payment on that card becomes $225. You keep paying the minimum on all your other credit cards. During this time. Once your card is paid off, you move on another card, transferring the entire amount ($225 in our example) on top of the next minimum. The real disagreement comes in when it’s time to order your debt. Should you pay off the smallest balance first? Or should you start with the card sporting the highest interest rate?
Pay Off the Smaller Balance First
The biggest argument in favor of paying off the smallest balance first deals with psychology. When you start with the smallest balance, you see more immediate results — especially if there is a lower interest rate on the card. More of your payment goes to the principal so you see a bigger reduction in the balance, and it doesn’t take as long to have the card completely paid off. Once you have paid off that first credit card, the feeling of accomplishment motivates you to keep going.
Since you transfer your entire payment to the next smallest balance, you see that one reducing reasonably quickly, as well. You can keep up your momentum. However, over the long run, there is a good chance that you will pay more in interest as you pay down your credit card debt.
Pay Off the Higher Interest Rate First
If you are interested in saving more money as you pay down your credit card debt, you can pay off the higher interest rate card first. This method is preferred by some because the longer you pay high interest — especially if your balance is higher — the more money goes straight into someone else’s pocket without benefiting you. By getting the higher interest rate out of the way first, you are eliminating the most expensive debt while interest accrues more slowly on your other credit cards.
The downside to this method is that things start off slow. You may not see dramatic progress at first. You need to have the discipline and the emotional fortitude to see it through. However, as you progress to other balances with lower rates, you will eventually see increased progress.
What you choose to do depends on your money personality. If you need the encouragement of paying down a debt quickly, paying off the smaller balance is better, even though you will pay more in the long run. It will keep you from becoming discouraged and giving up. On the other hand, if you are more interested in the bottom line, and you can see the end result without become discouraged by the slow start, paying down the highest interest card first is the best bet.
What do you prefer: Paying off the smallest debt first, or getting rid of the higher interest rate?
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.