What's Really the Best Way to Pay Down Credit Card Debt?
By Kristin McGrath
August 10, 2012
When you have a problem, do you tackle it logically? Or do your emotions take over?
When it comes to large amounts of credit card debt, going the emotional route might actually be best, according to a recent study from Northwestern University’s Kellogg School of Management.
There are two general conflicting schools of thought when it comes to paying off debt on multiple credit cards:
- Start by paying the card with the highest interest rate. Then move on to the one with the next-highest interest rate until all balances are at zero. That way, you minimize the interest you pay in the long run.
- Pay off the cards with the smallest balances first, regardless of the interest rate. With this method, you might end up paying more in interest charges — but you get rewarded with small accomplishments early on.
The first is the rational method — the one that makes the most economic sense. But it’s the second one that works best for those with large debts, say the Northwestern researchers.
By working with a large debt settlement company, the researchers were able to get detailed information about how 6,000 people paid off their credit card debt. For the purposes of the study, researchers defined “success” as paying off the entire debt — not as paying less in finance charges in the long run.
Turns out small victories early on keep debtors motivated — and energized enough to fight their debt to the very end.
I (thankfully) have never had to pay off lots of credit card debt on multiple cards. Yet I can appreciate the effectiveness of breaking financial chores into bite-sized chunks. Being able to check off a small task on my to-do list gives me enough of a boost to jump into a larger task that I might have balked at without a warm-up.
With financial strategies in mind, here are some of the best personal finance blog posts of the week:
Money Saving Mom shares some tips for dealing with failure.
20’s Finances ponders the advantages of leasing a car instead of buying used.
Money Beagle imparts some advice for getting through the rest of the summer on the cheap.
Financial Highway questions the effectiveness of pinching pennies.
See Debt Run documents how to adjust a budget when unexpected expenses come up.
Finance Fox explains how to avoid becoming house poor.