Credit Card Debt Reduction: Highest Interest Rate or Lowest Balance?

One of the debates right now in the world of personal finances and aggressive debt reduction is this:

Which credit card should I pay off first? The one with the higher interest rate? Or the one with the lowest balance?

As with most debates about personal finances, the answer depends on your personal situation, and what works best for you.

The case for highest interest rate first

This is the route that most financial money-crunchers will tell you to take. A higher interest rate means that you are growing your balance faster, and paying more money to the credit card company and less to the principal. You will pay less money in the long run by eliminating the card with the highest interest rate first, and then moving on down the line.

The case for the lowest balance

For some people, though, getting out of credit card debt is about the psychology of having all of those credit cards. And many people need to feel as though they are making progress. My husband and I fall into this camp. When we got rid of our credit debt, we started with the lowest balance. This meant that we paid of a credit card much faster than we would have if highest interest was our plan. Paying off that first credit card gave us a rush -- and the motivation we needed to keep going.

In the end, you need to do what will work best for you. Consider your preferences, and the psychology you have when it comes to money. Then choose the course of action that will best motivate you to pay off your debt.

Tags: personal finances, credit cards, credit card debt, debt reduction, credit card debt reduction, interest rate, personal finances blog