Which credit card to pay off first will depend more on your psychology than on financial goals. The main goal, with any credit card repayment strategy, is to get out of debt as quickly as possible.
For some people, this means paying off the card with the lowest amount due for the satisfaction of clearing a debt. For other people, this means paying off the card with the highest interest rate to decrease interest costs over time.
Here are the pros and cons of the most popular ways to decide which credit card to pay off first:
Debt snowball method
The debt snowball method is used to gain momentum when paying off debt. You pay the minimum each month on all cards, but choose to pay off the one with the lowest balance, so that debt is cleared. Follow up by paying off the one with the second-lowest balance, and continue doing so until all of your debts are paid off. As the name implies, you’ll start small and build momentum, just like a snowball rolling down a hill.
Here’s an example: Suppose you have 4 credit cards. The debt on them is $500; $1,000; $1,500; and $2000. That means you have $5000 in total debt. If you save $500 per month extra to pay off debt, in the first month you can clear the debt on the first card. Then, in the next two months, you can pay off the second card. With this strategy, in about 10 months, you’ll be able to clear all your debt.
Pros and cons of the snowball method
The main pros of the snowball method are the motivation it inspires. When you see, as in the example above, that even in the first month you can clear a card, it makes the debt seem less overwhelming. The little victories on the way inspire you to stick with it until all the cards are paid off.
The only con of the snowball method is that you might end up paying more in interest over time. If the card with the highest balance is also the card with the highest APR, you could pay several hundred dollars extra in interest in the time it takes to pay off the debt.
Who should try the snowball method?
If you don’t want to worry about interest rates or calculations, the snowball method is a good way to decide which credit card to pay off first. If you need regular encouragement to stay the course, the snowball method is also a good choice.
Debt avalanche method
In the debt avalanche method, you’ll focus on clearing the cards with the highest interest rate (APR) first. Like an avalanche starting in a big wave, you’ll focus on wiping out extra costs in interest as quickly as possible. This method can save you hundreds of dollars in interest, over time. For some people, it can be daunting because it might be months before you pay off your first credit card. But if you’re focused, it will get you to the goal faster.
Here is an example: Suppose you have the same 4 credit cards with debt as in the example above, but they each have a different annual percentage rate (APR) as follows:
- Card 1: $500 at 15% APR
- Card 2: – $1,000 at 20% APR
- Card 3: $1,500 at 19% APR
- Card 4: $2,000 at 24% APR
In this case, you would choose to pay off the card with the highest APR, card 4, before moving onto the card with the next highest APR, card 2. Card 1, with the lowest balance and the lowest APR will be the last card you pay off.
Pros and cons of the avalanche method
The main pro of the debt avalanche method is interest savings. If you have thousands of dollars in credit card debt, the savings while paying off credit cards can be significant. The main con of the debt avalanche method is that people tend to lose motivation.
Taking the same example as previously, where you have $500 per month to pay off a credit card, but using the debt avalanche method, it would take just over 4 months to clear the first credit card (card 4). For people who are working hard to save to pay off debt, waiting this long to pay off a credit card can be discouraging.
Who should try the avalanche method
If you’re super motivated to clear debt and can stick to a goal once you set out to accomplish it, the debt avalanche method will work for you. If you’re less motivated by small accomplishments (as in the snowball method) the avalanche method can also be a better choice. However, if you need regular little wins, you might be more motivated by the snowball method.
Build credit while paying down debts
The answer to which credit card to pay off first will depend on your personal situation. In reality, you don’t have to use either of the methods described here. You could also divide the $500 monthly evenly between the 4 credit cards. It is up to you. The main thing is to make a plan you can stick to and clear your credit card debt as quickly as possible!
Is it better to pay off a credit card or leave a small balance?
It is better to pay off your credit card in full every month to avoid accumulating interest.
What is the avalanche method?
The debt avalanche method is a strategy to pay off multiple debts. You pay the minimum on all debts except the one with the highest interest rate, where you’ll pay off as much as you can until that debt is cleared. Then you’ll continue with the card with the second-highest interest rate until you’ve paid off all debt.
What is the fastest way to pay off debt?
You could do this by paying more than the minimum payment on each credit card or choose the highest interest rate credit card down first, like the debt avalanche method above. You can also make weekly payments and consolidate or refinance debts to reduce interest.