I know of a very popular personal finance guru who suggests that his followers pay down their credit card debts by first attacking the cards with the smallest outstanding balances, and then moving on to cards with bigger balances.
The idea being that it is psychologically rewarding, and thus “easier,” to nibble away at a small card balance — pay it off eventually — and then move on to the next with a sense of accomplishment.
This kind of thinking makes me angry.
If you lack the basic self-discipline to pay down your cards in the right order, you’ll never master your personal finances — and I doubt you’ll ever become rich.
Instead of taking that guru’s bad advice, do what I do: pay down the card with the highest interest rate. Once that card is paid off, begin working away at the card with the next highest interest rate, and so on… The size of each balance is irrelevant. It’s the interest rate that matters.
Otherwise, you are giving the banks far too much of your hard-earned money in the form of interest payments.
Let me give you an example: let’s say you have balances stretched across three credit cards. One has a 21.24% APR, the other 15.24% APR, and the third a surprisingly humane 8.24% APR.
Make minimum payments on all three cards, of course, and shovel as much cash toward the 21.24% card as possible. Otherwise, you’ll be paying more than $2,100 per year in interest for every $10K you have riding on that particular card.
Once the bloodsucking 21% credit card is paid off, then begin chipping away at the 15% one…
Do what saves you the most amount of money over time, not what feels psychologically “rewarding.”
— provided by Outlaw; read more about which credit cards I recommend (and don’t recommend)