One of the hardest things about paying off debt is figuring out where to start. Should you go after the biggest balance first? Or would it make more sense to start knocking out some of the small stuff? One of our readers found themselves in such a dilemma:
I received a windfall of $6,000 and I want to pay off 2 credit cards entirely, but my husband wants to pay down one for $11,000. Which would be the best idea?
Like all financial decisions, each of these options has its pros and cons. And while we don’t know the interest rates on these credit cards, we can still go through some of the things our reader may want to consider before putting that $6,000 to use.
What Option Saves You the Most Money?
Again, we don’t know the interest rates on these debts, so the reader has to do a little math. A credit card debt payoff calculator (we have a free one here) can help them figure out how much money they could save in each scenario. In many cases, it makes sense to go after the balance with the highest interest rate, so you can reduce the amount you pay in the long run. But a card with a low interest rate and a high balance can also end up being really costly if you take a long time to pay it off. It’s really important to run the numbers when making a debt-payoff decision.
How Do These Decisions Make You Feel?
There’s a lot to be said about leaving emotions out of financial decisions, but a little can actually be helpful. Paying off two credit card balances can be really satisfying, and you’ll have two fewer things to worry about. On the other hand, making a dent in an $11,000 credit card balance can feel like incredible progress. Staying motivated is crucial to getting out of debt, so if there’s an option that excites you the most, it may be the right choice, even if it doesn’t save you the most money over time.
What’s Your Credit Like?
One of the most important aspects of your credit score is your amount of debt and how much of your available credit you’re using. To figure that out, you add up your total credit card balances and divide it by your total credit limits — that gives you your credit utilization rate, which credit scoring companies advise consumers to keep as low as possible (preferably below 30% and, ideally, below 10%). As our reader considers putting $6,000 toward their overall credit card debt, no matter how they distribute that money, they’ll lower their credit utilization rate.
The utilization rate on individual cards also plays a part in credit scores. If one of those cards is maxed out, it could help their credit scores to lower that card’s balance. (You can see how your credit card debt, and other things, are affecting your credit by getting two credit scores for free on Credit.com.)
It’s unclear from the reader’s comment if the credit card debt belongs to one person or both individuals. Each person has their own credit score, even if they’re married and have joint accounts, so that’s something for the reader to consider as well. Say the two credit cards the reader wants to pay off are their only credit cards and their credit score is suffering from the high balances. Paying off those cards would help their credit score, which may be important if the couple wants to buy a house or a car in the near future.
There’s not a single “best” answer to our reader’s question, but they can arrive at a smart decision by considering the outcomes of each possible choice and understanding how it could affect their financial future.