Which Credit Card Should I Pay Off First?

At some point in our adult lives, most of us have carried some credit card debt. In fact, the average American family owes nearly $5,000 to credit card companies.

Assuming an interest rate of 15%, an average debt of $5000 for one or more cards is costing us about $750 per year in interest. That’s the simple math of it.

Calculating the true cost of credit card debt is a bit more complicated than that, but now we have a number to work with that’s pretty close to the truth.

We’d all love to eliminate our credit card debt completely, to use that money for other things, but which credit card should you pay off first?

The best strategy to reduce credit card debt, with the ultimate goal of paying all the credit cards off, may be different for each family or each household. Cash flow, household budgets, and even personality types are all considerations.

Strategy One: Pay off the smallest credit card balances first

In a household which has multiple credit card balances, some say that the best strategy his to pay off the smallest balances before tackling the larger ones. The idea behind this is that of building momentum, of being able to see measurable accomplishments and progress right away. If you had 7 or 8 credit cards with balances and you can quickly knock out one or two of them, the feeling of accomplishment can be empowering, making a debt situation seem much more manageable. This approach isn’t necessarily consistent with the best strategy, mathematically, but it can give us the motivation to stay at it.

The psychological effect of having fewer bills arrive in the mailbox each week, and each month, can be a powerful incentive for many of us.

Strategy Two: Pay off the highest interest rate balances first

In paying off the credit cards which charge the highest interest rate first, we have math on our side. Putting any psychological effects of early successes aside, the math will always favor paying off the highest interest rate debt first. In some cases, the highest interest rate credit card may be among those with the lowest balances. This situation is common with special-purpose cards, like auto service cards or gas cards. If the high-interest cards are also the lowest balance cards, you can successfully utilize both strategies one and two.

If the highest interest rate balance is also among the higher balances in dollars, this strategy can work very well in the long term, financially, but it can also be very challenging. At times, it can feel like not much progress is being made because the balance is comparatively larger and will take a longer time to pay down than a smaller card balance that can be paid off quickly.

Still, in the long run, the math supports this strategy of paying the highest interest first, and if you have the discipline to chip away at the biggest mountain first, if that’s what’s needed, then this is the best way to go.

Strategy Three: Pay off the highest monthly interest amount first

It’s time to get angry, folks. Just a little bit. If you are a peaceful person, then you can think of it as finding some further resolve.

If you’ve ever taken a close look at your credit card statements, you’ll understand how this strategy can motivate.

Every month, the amount of money lost to interest charges is measurable in dollars. You can see the numbers right there in black and white. You can easily compare the finance change to the amount of money that you earn in an hour, or a day, or a week, and you can realize that part of your day is spent working just to pay interest.

Depending on the amount of debt, and the interest rate, as well as how much you earn, this amount of time might be measured in days and not just hours.

How many hours did you work today just to pay the interest?

This acute awareness again can be a powerful motivator, but only if we take the time to know the numbers. Just logging on and paying the bill can leave us in the dark about how much money a given credit card balance truly costs us.

If I’m earning $20 per hour and the finance charges for just one of the credit cards is $60 per month, I know that I worked three hours in a month to get nothing. Not a thing. If I factor in taxes and other typical payroll deductions, the cost goes up by at least another third. Now, I have to work for 4 hours just to pay the interest, for which I get nothing of present value. This continual flow of money from all of us is why credit card companies and banks have tall, shiny buildings in every city.

So, which credit card should I pay off first?

Looking strictly at the math of the question, the highest rate card should be paid first. In the long run, that strategy will save the most money in interest charges. It’s a math thing. However, despite the simple math advantage, paying the highest rate first may not be as successful in reducing debt for some people.

All three strategies have their merit, and each can be successful depending on what motivates you to make progress and pay off credit card debt. Some people like to build upon small successes, some people are generally peaceful and like math, and some people understand the motivational value of a little well-directed anger.

Do whatever works best for you. Just remember that you and I are paying for all of those tall, shiny, bank buildings with the interest we pay every month. I think I hear jackhammers in the distance; they’re building another one now.

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Eric Huffman

Eric is a Freelance Personal Finance Writer licensed in Property, Casualty, and Life Insurance.

With over a decade of experience writing on insurance and personal finance topics, as well as need-based consulting, he brings real-world knowledge to these important topics.

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