Lay everything out and make a note of the bills with the lowest balance and those with the highest interest rates. Let’s look at two approaches.
The Debt Snowball lists credit card debt from the lowest balance to the largest. While making minimum monthly payments on each card, you’ll devote more money to paying off the smallest balance first. When this is paid off, move onto the next lowest.
Tackling the lowest balance first and paying it off quickly can be a huge psychological win! You’ll likely feel a sense of achievement each time a debt is cleared.
Paying the smaller loan first may not mathematically save you the most money from interest, but you will stay motivated to keep going.
The Debt Avalanche is an accelerated debt repayment plan. Multiple debts often have different interest rates, so order your debts from the highest interest rate to the lowest. While making the minimum monthly payments on each card, you’ll devote more money to paying off the card with the highest interest rate first.
Once the debt with the highest rate is paid off, move your repayment funds towards the next-highest interest-bearing loan. This system continues until all the debts are paid off.
Mathematically, it makes sense to pay off debts with the highest interest rate to minimize interest.
Bottom Line: Whether you start with the lowest balance or the highest interest rate, paying off plastic is always a win. Don’t overthink it too much.
2. Avoid being a minimalist!
We have a tendency to rely heavily on the first piece of information we see when making decisions, and this affects how much we pay on credit cards.
What do you see first when you look at your bill? It’s the minimum payment. It’s presented on your credit card bill in large, bold text.
It’s no mistake the minimum payment is prominent on each bill – it’s meant to catch your attention and draw your focus away from the full balance.
This attention, or focus, is a well-known behavioral effect called anchoring.
Why it matters: Anchors can skew our judgement and prevent us from changing our perspective on new information. When decisions on credit card payments are anchored on a boldly printed ‘Minimum Payment’, we are more likely to repay less than they otherwise would and get zinged with interest.
The smaller payment — which is often thousands less — can also be a more attractive option when there are competing cards to balance.