Should You Pay Off A High Balance Or High Interest Rate Credit Card First?

So you've just come into a wad of cash and you're ready to pay off a big chunk of your credit card bill. Should you go for the one with the highest balance or highest interest rate first?

Photo by The Consumerist.

Finance blog Free from Broke examined this tough question from both sides. On one hand, a high interest-rate card costs you something every month, and compounds what you owe every 30 days. That's bad news if you're carrying a credit card with a 30 per cent interest rate.

On the other hand, high-balance cards are a drain on your wallet, too. Even if you have a low interest rate, you might be paying a hefty chunk of cash each month on a big balance. So what should you do?

According to the post, it doesn't matter a bit which card you pay off as long as you take some sort of action to better your credit score.

Open your wallet. Grab the first credit card you see. That's the one you are paying off! Pay the minimum on all the rest and pay everything you can into the one credit card you grabbed. Knock it out! I'm telling you it will feel great once that one card has a zero balance! Then take everything you were paying on that card and apply it to the next card. Which card net? Doesn't matter, remember? Grab the next card in your wallet. It may take some time but you will get those cards paid off!

Of course, this is only one take on the best approach to paying off credit cards, and every situation is unique. While nothing beats talking to a financial advisor face to face to deal with major credit issues, if you're talking about relatively small balances on a couple of cards, the grab-a-random-card-and-pay-it tack is probably just fine.

What would you do if you had to choose between paying off a credit card with a high balance or one with high interest. Share your thoughts in the comments.

Pay Off Highest Interest Or Highest Balance Credit Card – Analysis Paralysis [Free from Broke]


Comments

    That's totally irrational. You should always pay off the cards with the highest interest rate first. There are two components to your credit card debt: The total amount you have borrowed (which you are going to have to pay off sooner or later anyway) and the interest which accrues on your borrowings. The latter amount is the one that you have some control over when choosing which cards to pay off first.

    That's total hogwash.

    Pay off the card that's going to cost you the most (typically the high interest rate).

      I agree.. Pay off the card that will cost you the most each month..
      Even better don't have a card or don't have more than one. learn to spend the money you have rather than the money you haven't!

    What you should do is roll up most of the debt into a personal loan at the best rate you can find. Maybe take advantage of a balance transfer to a card for any amount you're sure you can pay off quickly in 6 months (when the low balance transfer rate normally expires). Then just run 1 credit card with a manageable credit limit & run a debit card attached to a savings account as a backup (in the event your credit card number is out of action due to loss, compromised number etc). Unless we actually structure things to keep ourselves out of excessive debt, most of us will keep repeating the same errors. And those credit card offers that come in the mail? Tear them up & throw them in the recycle bin.

    I have just been reading about this in a free E-book called dump your debt via Money Magazine that examines this from both sides.
    While it may be the financially best solution to pay off the highest interest first, sometimes the emotional advantage to seeing a large chunk of your debt disappear can help spur you on to pay off the rest of your debts quicker.
    Yes you may pay a bit more in the long run, if you are drowning in a sea of debt, It helps to be able to see the shore.

      While I agree what you are saying, you can still do this by paying off the card with the higher interest rate first and you will come out in front every time.. Finances have nothing to do with emotion, this kind of misinformation serves only the banks!

      The most important thing to note is to CUT UP your high interest credit cards, never take a high interest credit card FOR ANY REASON, and CANCEL your credit card if your bank puts the rate up mid-term.

    As an Accountant. What a load of crap. Highest down to lowest. Modified by the concept of Private debt first highest to lowest then Business debt highest to lowest

      Well Scott that just show how little accountants know about money.

      If you have two cards on with 10k on it at 10% and one with 5k on it at 30%. Your monthly interest bill on the one with 10k would be approximately $85 per month vs on the 5k credit card approximately $125. I know I would rather cut down the interest I was paying the bank first, something about the cost of money?

    of course it matters. You pay off the high interest card first

    Consolidate debt. Find a low interest balance transfer cc and pay them both off, and then pay that card off as quickly as possible while you are the lowest interest rate. Don't forget to request that your cards are closed. It's easy to pay off the card and leave it with a zero balance only to rack up the debt again.
    Never just pay the min balance or it will take you 20 years to pay off your 10k card, and avoid using cash withdrawals as your interest is calculated on the day you withdraw.

    Oh dear. Looks like Lifehacker's found a financial analyst who can't wield the Compound Interest formula. I was about to jump in here all full of maths-rage but it seems plenty of people have done so already. :D To put it my way though, if you have 10 bucks to spend paying off debt, spend it the way that produces the biggest saving next month. That's the one with the highest interest rate - biggest bang for your $10.

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