So you’ve made the decision to pay off your credit cards—that’s great! There’s just one problem; you have multiple cards with different interest rates, payment amounts, and total balances. How do you know which credit card to pay off first?
There are several ways to approach paying off your cards, and the best answer is dependent largely upon your own situation and what’s best for you.
Should You Prioritize High-Interest Credit Card Debt First?
One approach is laying out a list of your credit card debts based on their interest rates. It’s called the avalanche method. Whatever the highest rate card is gets paid off first, regardless of what the balance on that card is. While you pay the minimum payment on your other cards, take any and all extra money you have and put it toward the card with the highest interest rate.
Once you’ve reached a zero balance on that card, the same applies to the next card. All available funds go to pay off the next highest card, and so on. Since you have one less credit card payment to make now, that extra money that would have gone to the first card now goes onto the second, and so on. This method helps stop interest compounding on your balance, being added to the principal, and then accruing interest of its own. It also helps you save the most money as a result.
It’s not perfect, however. If your highest balance card is not also your highest interest rate, then you’re stuck looking at that high balance card for a while. If you choose this method, you can reassure yourself that you’re saving a lot of money—and you’re preventing that higher interest card from accruing more.
Should You Pay Down High-Balance Debt First?
There is another option if you don’t want to pay the highest interest rate first; you could tackle the card with the highest balance first. Also called a form of the snowball method, it’s similar to the avalanche method in that you pay the minimum on all other cards except the one you’re working on paying off. All extra money—including anything you can spare from taking a break from favorite hobbies or habits—goes toward paying off the card at the top of the list.
Like the other method, after you pay off the top card, most of your money is then put toward the next card on the list. Paying the card with the most money on it lets you get those excessively high balances under control as soon as possible.
It has its own drawbacks, however. If you’re working on the card with the highest balance, the card with the highest interest rate is still increasing exponentially due to compound interest. That means while you’re paying off the first card, the other high-interest card could end up costing you a lot of money.
Knowing which method to choose is dependent on your situation as there is no definitive answer to whether you should pay off higher interest or higher balance cards first. If your highest balance card also has the highest interest rate, then the decision is simple. If, however, you have your highest balance on the card with the lowest interest rate, then your best bet is probably going to be the card with the highest interest rate—even if the balance is lower.
Author: Jeff Gitlen
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