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Debt Repayment: Which To Pay First?

By Michael Peterson
In January 21, 2019

Debt is no walk in the park. At times, it can seem more like an uphill battle. This is especially true when you’re dealing with multiple credit cards with large balances. Which one do you focus on first? Do you put all of your extra cash into one card, or spread it around evenly? Is there a “correct” order to debt repayment?

More importantly, how do you keep your morale up? How do you stay the course and remain focused until you’ve paid down your debt? In this blog, we’ll take a strategic look at how to pay off multiple debts.

Let’s consider three common strategies for prioritizing credit card payments. They’re each a little different, and there’s no “right” or “wrong” choice. It all comes down to personal preference. The important thing is that you commit to one of the strategies and follow through until you reach your goal. It will take time and effort, but it is definitely an attainable and rewarding accomplishment.

Before you decide which card to pay off first, sit down and gather all of your credit cards. Note the following information:

  • The total balance on each card
  • The minimum payment on each card
  • The interest rate on each card

Now, you’re ready to decide which repayment order is right for you. Check them out below – and get ready to live a debt-free life!

Option 1: Start small.

One popular method is to pay off the card with the smallest balance first, then move to the next-smallest and so on. The great thing about tackling credit card debt from smallest to largest is that it helps keep you motivated, with lots of small “wins” to celebrate as you move to the larger balances.

Here’s how it works:

  1. Identify the credit card with the smallest balance. This is the one you’ll focus on first.
  2. Pay the minimum payments on all of your credit cards, except for the card with the smallest balance. For that one, you’ll want to pay as much as you possibly can every month.
  3. Do this until the card with the smallest balance is paid off.
  4. Find the card with the next-smallest balance. Take all of the “extra” money you were using to pay off the small-balance card, and roll it over to this card. Continue to pay the minimum on your other cards.
  5. Repeat until the debt is gone!

start smallOption 2: Focus on interest rates.

If you’re someone who thinks long-term, paying down your credit card debts by interest rate might be the best path for you. After all, this strategy might not give you the same feeling of instant (or near-instant) gratification as Option 1, but focusing on knocking out the highest interest rates will help you save the most money over the long haul.

Remember that list of credit cards you made earlier? Look for the card with the highest interest rate, and zero in on that one. From there, you’ll follow the same basic strategy: Pay the minimum payments on the cards with the lower interest rates, and funnel everything extra into the card with the highest interest rate.

Once the card with the highest interest is paid off, use all of your “extra” money to pay off the card with the next-highest interest rate, and so on.

Option 3: Credit score quick-fix.

If your credit score is down in the dumps and doing you no financial favors, you might want to pay down your cards in order of utilization, i.e., the amount of credit you’re using on each card compared to the available credit (or credit limit).

Here’s why this can help: Part of your credit score is based on something called “utilization,” which means how much of your available credit is in use at any given time. Lower utilization equals a higher credit score. Higher utilization will knock your score down. For example, if you have a $2,000 balance on a card with a $4,000 limit, you’re at 50 percent utilization. That’s pretty high – and it’s likely had a negative impact on your credit (for some perspective, “good” credit utilization is typically around 30 percent or lower).

You can try to boost your credit score back up by tackling your debt in order of utilization. Start with the card that has the lowest percent of available credit, and work from there.

We’re Here to Help!

Keep in mind that no matter how you choose to pay off your debt, it’s always a path worth taking. If you need help along the way, you can always reach out to the friendly team at DebtGuru.com.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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