Interest Rates or Balances? Which Debt Do I Tackle First?

QuestionsThere is a lot of question about paying down those credit card debts and which ones should be paid down first.

Should I pay down the one with the highest interest rate, or do I tackle the one with the lowest balance?

There is not a right or wrong way to do this as you are paying down your debt (which is a good thing).

However, there can be motivational reasons which make one option a little more appealing.

We all know that interest is continually compounding on your outstanding balances.  This in turn keeps increasing what you owe (which creates a lot of frustration and stress).

When you owe on your credit cards, your interest keeps compounding and that increases the amount you owe.  I am sure you keep sending in the minimum (or even trying to send in a little more) to each card.

Here is an analogy for you:

If you have a large fire going and dump a cup of water on it, you will do nothing.  You might make the flames go down for a minute, but they will return (usually stronger than ever).  You have to figure out a way to really tackle it and get it under control.

However, if you dump a bucket of water on that same fire, you may not put it out completely, but you will probably make it smaller.  If you throw two or three more buckets it, you can actually extinguish it.

The same hold true with credit card debts.

When you make small, minimum payments you are throwing cups of water on a fire.  However, if you send in a larger amount, you can actually pay it off much more quickly. But of course, you can’t send in larger amounts to everyone at once, so you have to prioritize.

There is a lot of discussion about paying down higher interest rate cards first or those with a lowered balance first.  I recommend a lowered balance.  When you can actually pay off a credit card completely, it gives you a sense of accomplishment.  Suddenly, you feel like you can actually do this.

This is what is called a Debt Snowball.

A debt snowball is just what it implies. You tackle the lowest debt first. Then, when that bill has been paid off, you roll that payment into the next highest debt.

Once you pay off that debt, you roll that payment into the next debt — like a snowball.  When you roll a little snowball over the snow, it continues to grow, as you are always adding more snow to it.

Pretty simple concept, isn’t it?

In many instances, the card with the highest interest rate can also list one of your highest balances.  That means it can take a lot longer to get that one paid down and you may lose your drive and desire to keep at it.

It takes much longer to see results. Plus, if it takes you 2 years to pay down one card, when, in that same time, you could have paid off 2 other bills, you might end up paying more in interest anyhow.

It can place you into an endless cycle.

Whichever way you decide to tackle those credit cards, it is good that you are doing just that. While there is no such thing as good debt, credit card debt is the worst debt.

One day you will be able to live a debt free life — and it will be the most amazing feeling in the world!


About the Author:

Tracie FobesTracie Fobes and her husband live in Missouri with 3 young children. In 2007 they decided to change their financial lifestyle and paid off more than $37,000 in debt in 27 short months.

In 2012, she helped her readers pay off more than $400,000 in debt. She now shares her money saving and debt reduction tips daily on Penny Pinchin’ Mom.

  • Chase

    I like to combine the two methods. I have four different credit card debts I am currently paying off (almost down to three!). If all the debts are close to each other in value, then I pay the highest interest card first. I define “close in value” as pay-off date within three months of each other based on my budget.

    However, if I have a debt that I could pay off quickly, then I’ll pay that one off first to get some positive feedback/momentum for the rest of the debts.