Credit Cards

Paying Off Credit Card Debt? Size Doesn’t Necessarily Matter

Comments 4 Comments

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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  • http://credit.com PHILIP

    I am trying to pay off the smallest balances first. Trying to free up more
    money to pay off more bills.

  • Cherif Medawar

    How about paying them all off except one by using the check the credit card send you. Then negotiate the interest rate with them and make every effort to cut monthly expenses till you pay them off.
    Your credit score will improve and you will feel relieved.

    • Albert

      What you’re talking about is closing the accounts and consolidating into one account. The problem with your idea, is that closing accounts WILL hurt your score. Having accounts open for a long time in good standing is far better than closing accounts. Also, your ratio of credit balance vs available balance will be terrible, thereby lowering your score further.

      Cliffs: Your idea is awful and will hurt far more than it helps, regarding a credit score.

  • Brad

    Paying down the balance on a credit card doesn’t mean you close the account. If you pay off the smaller balances and have only one card open with the full balance, though, it won’t necessarily help your credit score. This is because you will still have the same percentage of credit utilization overall.

    Now, as you continue to pay down the single card, your credit score will increase, just as it would if you continued to pay off the several smaller debts. For some people, this may be a great strategy as it feels better to be paying only one lender instead of 3 or 4.

  • Pingback: How to Raise Your Credit Score in 12 Months or Less – The Faster Times |

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