should you pay off the highest credit card first

Should You Pay Off the Highest Credit Card First?

When you have multiple credit card debts, deciding which one to pay off first can be tricky Some experts say you should pay off the card with the highest interest rate first But I disagree – I think it’s better to pay off the card with the smallest balance first. Here’s why.

Paying Off Credit Card Debt – An Overview

Before we dive into the different strategies, let’s go over some credit card debt basics:

• Credit cards generally have much higher interest rates than other types of debt like student loans or car loans. The average credit card interest rate is currently around 16% – 20%.

• Carrying a credit card balance means you’ll pay interest on that debt. Credit card companies calculate interest daily, so balances accrue interest quickly.

• Only making minimum payments on credit cards means you’ll be in debt for a very long time. For a $5,000 balance at 18% interest, it would take over 17 years to pay it off only making minimums!

• Reducing credit card balances can help improve your credit score by lowering your credit utilization ratio. This ratio compares how much credit you’re using versus how much is available to you.

Now let’s look at two popular methods for deciding which credit card to pay off first.

Paying Off the Card With the Highest Interest Rate

This debt repayment strategy is known as the avalanche method. The idea is that you’ll save the most money on interest by eliminating your highest-rate debt first.

Here’s how it works:

• List all your credit card debts and their interest rates.

• Pay the minimum on all cards except the one with the highest interest rate.

• Put as much money as possible towards the highest-rate card until it’s paid off.

• Move to the card with the next highest rate and repeat.

Pros:

• Mathematically, this method makes sense. You’ll save the most in interest payments by tackling high-rate debt first.

• You can calculate exactly how much you’ll save on interest.

Cons:

• It can take a long time to finish off a large, high-interest balance. This can drain motivation.

• You don’t get the quick “wins” of eliminating debts completely like you do with the debt snowball.

• It usually means tackling your largest debts first, which takes more money upfront. This can be difficult.

Overall, this method looks best on paper. But in practice, it doesn’t work for everyone because of the psychological component. Let’s look at why.

Paying Off the Card With the Smallest Balance First

With the debt snowball method, you pay off your smallest debts first regardless of interest rate.

Here’s how it works:

• List your credit card debts from smallest balance to largest.

• Pay the minimum on all cards except the smallest balance.

• Attack the smallest balance with a vengeance until it’s gone.

• Roll the amount you were paying on the first card into your next-smallest balance. Repeat until all debt is gone.

Pros:

• You get quick wins that energize you to keep going. This creates momentum.

• It feels attainable because you’re starting small.

• You’ll eliminate debts completely in a short time period.

• You’ll free up more money faster to put towards larger debts.

Cons:

• It may cost more in interest compared to the avalanche method.

• You won’t save as much money overall.

So Why Does Paying the Smallest Balance Work Better?

Paying off the smallest debt first provides more motivation. Here’s why:

• Quick wins are enormously motivating. When you completely pay off a credit card, you get a huge mental boost. This creates momentum to keep attacking your next debt.

• Large balances are discouraging. When all your money feels like it’s barely making a dent, it’s easy to get overwhelmed and give up.

• Small victories inspire hope. Knocking out a few small debts gives you belief that you can do this.

• You see results faster. Less time between wins makes you feel like you’re making real progress.

For these emotional and psychological reasons, the debt snowball method works better for most people. The key is consistency and persistence, and the snowball builds that habit through early wins.

What If the Highest Rate Card Has a Smaller Balance?

Sometimes your highest interest rate card also has a lower balance. If this is the case, that card becomes the obvious first target.

Knock out the small, high-rate balance first. You get the quick win and save on interest. It’s the best of both worlds.

After that, switch back to the debt snowball method for the remainder of your balances. Pick the next smallest balance and keep plowing through your debts.

Other Ways to Pay Off Credit Card Balances Faster

To speed up the process, here are some other smart strategies:

• Pick up a side gig for extra income to throw at your debt. Things like driving for a rideshare service, freelance writing, or pet sitting are flexible ways to earn.

• Trim your budget temporarily while paying off debt. Cut back on dining out, entertainment, and other discretionary purchases.

• Ask for a credit limit decrease after paying off a card. This instantly improves your credit utilization.

• Transfer high-interest balances to a 0% intro APR card. But have a plan to pay it off before rates increase.

• Consider consolidating or refinancing multiple cards through your bank. This can lower your overall interest rate.

The Debt Snowball Is the Best Way to Pay Off Credit Cards

When deciding which credit card to pay off first, the debt snowball method beats the debt avalanche. By focusing on small wins first, you’ll build momentum and stay motivated. This consistency is key to getting out of credit card debt fast.

So take control of your credit card balances. Make a debt snowball plan and start knocking out those small debts today. Before you know it, you’ll be enjoying life debt-free!

Generally, it’s better to pay off the credit card with the highest interest rate (APR) first, while making minimum payments on others, to minimize overall interest paid. This strategy is known as the “avalanche method”.

The “15/3 rule” in credit card management refers to making two payments during a billing cycle to potentially improve your credit score. The first payment, at least half of the balance, is made 15 days before the due date, and the remaining balance, including any new charges, is paid 3 days before the due date.

Yes, paying off your credit card early can positively impact your credit score, primarily by lowering your credit utilization ratio. This ratio, which is the amount of credit you’re using compared to your total available credit, is a significant factor in credit scoring.