When you have a number of credit cards with balances to pay off how do you know where to start? It can be confusing, and you may get conflicting information and advice depending on who you ask.
We’re going to look at the question ‘which credit cards should I pay off first?’ and help you come up with a solution.
How To Calculate Which Card To Pay Off First
To help calculate which credit card to pay off first, we considered four strategies. These are by no means exhaustive but will help you to devise a credit card debt repayment plan.
Pay More Than The Monthly Minimum
All credit card debt will have a monthly minimum payment that you must make. This is not a suggested payment amount by the credit card company but rather the smallest amount you can pay to maintain your credit.
If you only pay this amount each month, it will take a long time to pay off your credit card balance, and you will end up paying more in interest overall.
Paying off more than the monthly minimum means you will clear the balance more quickly and reduce the amount of interest that you pay.
Budget What You Can Afford To Pay Off
To determine how much you can afford to pay off your credit card, assume you will make the minimum payment. Now calculate the rest of your monthly essentials and add them to your budget of credit card minimum payments.
Deduct this from your monthly earnings and then decide how much of your spare cash you can dedicate to credit card debt repayment.
Check Your Credit Cards’ Balances & APRs
Look at your credit card statements, find your balances and your APRs or Annual Percentage Rate, and write them out. You can see at a glance which cards have the highest interest rates and which have the highest balances.
This will allow you to decide which card you should pay off first.
Choose A Good Repayment Strategy
So by now, you know how much you owe and what you are able to afford to pay towards clearing your credit card debt.
There are three ways of doing this. The snowball method, the avalanche method, and balance transfer. Not all will suit everyone, so choose the one that works best for you.
Snowball Method
This method involves paying off the smallest balance first while paying the minimum payment on the other cards. It won’t greatly impact the amount of interest you are paying, but it will build momentum and motivate you.
To do this, select the card with the lowest balance. Add the minimum payment to the amount you have chosen to dedicate to paying off your card. This is the new amount that you will pay toward this card’s balance until it is cleared.
Now add that monthly payment to the minimum payment on the card with the next smallest balance. Continue this process until the rest of your cards are paid off.
Avalanche Method
This method involves paying the highest APR card first and then continuing to the one with the next highest APR.
Calculate the monthly amount you will dedicate to paying off the card and add it to the minimum payment of the highest APR card.
Once it’s paid off, add this new monthly payment amount to the minimum payment on the card with the second-highest APR.
Repeat with the rest of your cards until all the balances are at zero.
Balance Transfer
For those with good credit scores, a balance transfer may be an option for paying off credit card debt. This method involves consolidating your credit card debt onto one zero or low-interest credit card for 6-18 months.
The point of this is to pay off the balance in a period of zero or low interest. This saves you money on interest payments, but there are some things to consider before you proceed.
You may have to pay a fee or a percentage of the balance transfer. It may also involve making some large monthly payments to clear the balance before the end of the promotional period.
After this, the APR will increase significantly. Taking out another credit card can negatively impact your credit score as you will be subject to a hard inquiry or credit check.
Which Credit Card Should You Pay Off First To Improve Your Credit Score?
Paying off the balance of your credit cards will improve your credit score. But paying off the ones that are least likely to transform into debt is possibly the best option.
If your debt gets out of control, and you struggle to pay even the minimum monthly payment your credit score is going to be affected by late payment reporting.
Other Ways To Pay Off Credit Card Debt
There are other ways to pay off your credit card debt.
Reduce Spending
This can be easier said than done, but limit any unnecessary spending and try to budget to live within your means. For luxuries and occasional treats, open a savings account.
If you do need to borrow money, opt for a personal loan or a less expensive line of credit.
Transfer A Balance
If you have the option, transferring a balance can reduce the amount of interest you pay. You just need to make sure you clear the balance before the end of the promotional period, or you’ll end up back where you started.
Rate Reduction
You could request a rate reduction from your lender if you have a good history of on-time payments with them and your account is in good order. It won’t always work, but it’s worth asking.
Final Thoughts
We hope this guide to which credit cards you should pay off first has been helpful and will allow you to clear your credit card balances.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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