If there is one thing that any good personal finance analyst will tell you, it’s that isn’t never a good idea to just pay the minimum on your debts. This will cause you to pay much more in interest and extend your debt for a much longer time than you would like. But what happens if you a four or five different credit cards and you’re floundering? You know you shouldn’t just put down the minimum on every single card, but you can’t afford to put down more on every single one. Should you pay off the smallest debt first or the one with the highest interest rate first? Here are cases for both.
Paying Off the Smallest Debt First
Some finance experts recommend paying off the smallest debt first. Now this won’t save an individual as much money in the long run unless for some reason that small debt has an extraordinarily high interest rate as well. However, it could build a snowball effect. If he or she hasn’t been great with paying off debt, just getting one bill off the books can go a long way in helping an individual stay motivated to keep going with their debt payment plan.
Paying Off the Debt with Highest Interest Rate
If an individual’s primary motivation is just to save the most money possible, it might make the most sense to tackle credit cards by how much he or she has to pay in interest for each. Let’s say you’re paying 22% interest on a $1,000 credit card balance. You’ll save much more money paying this off first than focusing on a $300 balance that has a 18% balance.
In the end, the most important thing is to pick a plan that you can stick to. According to finance expert, Jeremy Marcus, individuals can do the most to improve their credit scores by getting their credit utilization under 30%. A low credit score can have serious consequences, including denied credit, rejected rental applications, and even a failure to get a job. However, it is very easy to get back on track, but you need a sound plan.
If you can’t do it on your own, it might be a good idea to speak with a personal finance adviser or debt specialist for professional advice on how you can reduce your debt. By paying off your debt, you can be well on your way to financial freedom.