Paying Down Credit Card Debt: High Interest First

Credit card debt can be devastating. It represents a drain on your discretionary spending, limiting your ability to do what you want with your own money. However, paying down credit card debt can be a daunting task. The important thing, though, is to get started. Start out by making a list of all of your credit card balances, and the interest rates that you pay on them. Then, order the debts from highest interest rate to lowest interest rate. This is the order you will pay off your credit debt in order to save the larger amount of money.

Why You Should Pay Off the Highest Interest Debts First

One of the biggest arguments in the world of personal finance is whether you should pay off your credit card debt by starting with the smallest balance, or whether you should focus on paying off the debt with the highest interest rate first. While it might be emotionally satisfying to pay off the smallest balance first, it isn't always the best idea. This is because the interest rate will really get to you. You could end up paying a lot more if you keep cards with higher rates.

Interest is money that you pay for the privilege of borrowing. It is a percentage of your balance. So, the higher your interest rate, the higher the percentage of your balance you are paying. Interest rates are figured on an annual basis, but they are often divided up to be applied every month. Let's say you have two credit cards:

1. Balance: $1,500 Interest rate: 9.99%
2. Balance: $2,500 Interest rate: 19.99%

You might be tempted to pay off the low interest credit card first, since that balance is lower. However, look at the high interest rate with the second credit card. With your first credit card, on interest compounded monthly, you would pay $12.49 in interest. With the second card, though, you are paying $41.65 in interest. Of course, the numbers change as you make payments. But you can see the difference. It's better to pay off that high interest credit card first. You're still paying interest on the lower balance, but it's much better than dragging out more than three times the interest.

Of course, in some cases you might feel as though you aren't making any progress. This can be discouraging. If you need the emotional boost of paying of a credit card in order to keep yourself from giving up altogether, then perhaps you should consider paying off the smaller balance first. However, from a purely monetary standpoint, it will benefit you more if you can find the resolve to pay off your highest interest credit cards first.