Conventional wisdom says if you have more than one source of debt, you should pay the one with the highest interest rate first since it makes the most financial sense. However, a new study finds people are more successful eliminating debt if they pay the smallest debt first regardless of interest rates.
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Marketing professors from Northwestern University’s Kellogg School of Management used a debt settlement database to analyse how 6000 people paid off their credit card debt. They found that the “small victories” approach of closing accounts increased the likelihood of getting out of debt:
“We found that closing debt accounts – Independent of the dollar balances of the closed accounts-predicted successful debt elimination at any point in the debt settlement program,” Gal says.
Those who started with paying off small balances were even more successful than those who paid off a larger portion of debt first.
Dave Ramsey, who champions this “debt snowball method”, says that getting out of debt isn’t about maths — it’s about changing behaviour. So even if it doesn’t make as much sense financially, it’s a better way to motivate yourself towards your goal.