For those struggling with credit card debt, coming up with a repayment plan can be a challenge. Should you focus on the highest-interest card or the one with the lowest balance? What if you have student loans or car loans mixed in? Dealing with so many different monthly payments at once can be overwhelming.
The Motivational Perspective
Which credit card you deal with first depends on two factors. First, there’s the psychological aspect. Many people tend to pay off the lowest-balance card first because of something known as “debt account aversion.” That is, we aim to limit the number of open accounts we have.
Paying off the smallest card first means one less account we have to deal with. Getting rid of one balance is a small victory, which gives us motivation to move forward with our plan. Experts have come up with a cute name for this strategy: Debt snowballing. The idea is that you build momentum by paying off smaller accounts first, then putting those payments towards larger accounts.
This path certainly makes sense from a motivational standpoint, but is it best for you wallet? You also have to consider the financial aspect of debt repayment.
The Financial Perspective
From a purely financial perspective, paying off the highest-interest card first makes the most sense. Using this method you’ll pay less in total interest to the credit card company and reduce the time it takes to repay the debt.
Let’s say you have two credit cards. One card has a balance of $8,000 at 19% and the other is $5,000 at 15%. Both have minimum payments of $40. Psychologically, you’d be tempted to pay off the $5,000 balance first to eliminate one of the accounts. But I’ll show you why this is bad for your wallet.
Making the minimum payment, it will take you over 10 years to pay off both balances. But since you’re on top of things, you have an extra $300 to put towards the cards each month beyond the minimum. Where should you put this extra money?
By paying $340 to the $5,000 card and the minimum to the $8,000 card it would take you 49 months and cost $5,575 in total interest.
On the other hand, by paying off the larger card first it’ll take you 47 months and cost $4,754 in interest. Focusing on the higher interest rate first saves you $821 and will take you 2 months less to pay off both balances.
You’re probably thinking that $821 is a lot of money, and you’d be right. But let’s say you cut back on eating out, giving you an extra $100 a month to put towards the cards. It will now only take you 35 months to pay off both balances, a full year less. Not only that, it will save you another $1,343!
Applying every bit of extra money you have each month to debt repayment is known as “snowflaking.” Snowflakes can come from anywhere – income from a side job or savings from decreased expenses.
Which Strategy is Right for You?
Your repayment plan should depend on your personality. If you’re very disciplined with money, focusing on the highest-interest card first is probably your best strategy. On the other hand, if you think you’ll need small victories as motivation to stay in the game, paying off low balances first (the snowball method) might be your best bet.
No matter which strategy you choose, your goal is the same: to pay off the debt. Having the numbers in front of you will only increase your focus. Use a debt repayment calculator like this one to help you build and track your strategy.
Which repayment strategy makes the most sense to you?
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Your Life for Less 
HI YLL,
Great analogy, love how you offer two choices too , based upon your personality. That’s a really practical approach to personal finance because it allows either type of person a chance to save money and pay off their debts quicker.
Thanks!
Hi RBTS! Thank you for your comment. Yeah, it really depends on your personality which option is best. Each has its benefits, but the most important repayment plan is the one that’s followed to the end.
I don’t have any credit card debt and never really have had much. But I know the accountant in me would always pay down the card with the highest interest rate. It gives the most bang for the buck.
Hey Justin, you’re right. From an accounting perspective focusing on the highest interest rate is best. I wanted to include the other option here because people are so different in terms of personalities. A lot of us need those little victories that come with paying off an account. I don’t think there’s anything wrong with this – in fact, if it helps you pay off your debt it’s a good strategy!
I’m one of those people that would rather take the logical approach and pay off the highest interest first. I think the psychological approach is more for people who are really struggling with their debt and need the extra motivation to keep working at it. For me though, I’d rather save more money in the long run.
Good point, Jeremy. I’m also the logical type, and I’m applying this approach to our current debts. I think as long as you meet your goal of paying off your debts, there’s no right or wrong way to do it.
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People definitely have to do things the way that will make them most comfortable. If paying off the smallest balance works best, then that is the way people should go. Sometimes the best financial way isn’t the best way for an individual. If I had a $1000 credit card balance with a 10% rate, and a $10000 balance with a 15% rate, I would pay off the $1000 first because it would give me more motivation to tackle the $10000. If I had two credit cards, my motivation to pay off both would be diminished.
Hi, James! I agree that the best method isn’t the same for everyone. You have to consider your personality and money management style while coming up with your debt repayment strategy. Motivation plays such a big role in personal finance!
A great thought provoking post. I would like to raise another issue which I believe is vital, no matter which method you use, if you want to be free from credit card debt, especially.
Have you got a safety net? An amount saved in a special account which is there for emergencies. eg you lose your job, travel needed for family bereavement, car needing greater repairs than you can cope with from your normal savings.
If you do, then pay off your credit cards and other debt, whichever way suits you.
If not, then I advise you to pay the minimum off your debts until you have saved sufficient money to pay for the essentials: food and shelter for you and your family and essential clothing, for at least three months.
Otherwise your credit cards become your safety net and the cycle of debt continues.
Hi Jill! You bring up a great point about emergency savings. Some people use their credit cards for this, but that’s not a good idea. You’re much better off using cash that you’ve put aside just for this purpose.
I think it’s a good idea to have a basic $1,000 set aside in a savings account or something similar. Then you can focus on paying down high-interest debt. When that’s all gone you can work on building up to 6 months of living expenses. That’s just my opinion, of course!
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