I’ve been asked a millions times, “Which of my credit cards should I pay off first? Should it be the one with the highest interest or the one closest to default?” The answer is, as it almost always is in the credit world: It depends. It depends completely on your reason for paying off the debt. Are you trying to save money on interest? Are you trying to improve your credit scores? Or are you just sick and tired of writing a check to the bank every month?
There are four different strategies for paying off credit card debt. Each of these will yield a different result. It’s really up to you, the consumer, to figure out which one is best for you.
1. Paying off highest interest cards first – Clearly this is a money saving strategy. Expensive debt, like credit card debt, is a bad thing. Why? Because it’s money going to a bank rather than to your savings. Throwing every available dime at this debt is usually a good idea, especially if you’ve already built an emergency fund.
2. Paying off the cards with the lowest balance first - This is a “feel good” strategy normally referred to as snowballing. You pay off a small debt, celebrate the fact that no more statements are coming, and then throw an equal amount of money toward the next lowest amount of debt. The theory is that your momentum will carry you through the tough times and you’ll continue to pay off debts until they’re all gone.
3. Paying off the cards with the highest utilization – This is for credit cards only. The strategy is to pick the card that is the most highly utilized and pay them down first. For example, if you have a card with 75% utilization (balance divided by the limit) and that 75% is higher than any other card, that’s the one you tackle first. This will help to improve your credit scores as you’re paying down your debt, which could prevent your issuers from closing accounts, lowering credit limits or increasing interest rates.
4. Paying off the card which is the most delinquent first – Clearly this applies only to those who have delinquent credit card debt. The problem, one of many, with delinquent credit card debt isn’t the just the fact that it’s delinquent. It’s the fact that delinquent credit card debt eventually becomes defaulted credit card debt and is sold to a collection agency. Now your credit card debt is showing up twice, as a charged off account AND as a collection. And if the balance is high enough you can be certain that the collection agency will sue you, which means a judgment might show up on your credit reports as well. This can be avoided by ensuring none of your credit card debts end up in default.
Any way you slice it, paying down credit card debt is a good thing. Which strategy is right for you? Only you can answer that question.
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