Are You Paying Off Credit Card Debt the Wrong Way?

When you have more than one credit card to pay off, there are many ways to go about tackling your debt. You could pay off cards with highest interest rates first, or you could pay off cards with the smallest balances first. Or, you could make bigger payments toward cards with larger balances, and smaller payments toward cards with smaller balances.

It matters which order you pay off credit cards if you want to get out of debt quickly. Unfortunately, most people are going about it the wrong way.

Going above the minimum

When you get your credit card bill, it will state the minimum monthly payment you are required to make, typically 2 to 5 percent of your account balance. This minimum payment amount will avoid you having to pay late fees and will keep your credit score stable, but that’s about all it will help with. Depending on the interest rate, it could take you over 30 years to pay off a credit card making only minimum payments. If you want to pay off your credit cards in a reasonable amount of time, you will need to make more than the minimum payment every month. (See also: All the Ways Minimum Payments Are Evil)

How should you distribute additional payment funds that are above the minimum payment amount? Which card (or cards) you pay down first can make a big difference in terms of how long it takes to get out of debt and how much it costs to pay off the debt. It turns out that most people are using a repayment strategy that takes longer and costs more than necessary.

The trouble with balance-matching

According to a recent study conducted in England, a majority of people who are making payments on multiple credit cards are using a repayment strategy that can be described as “balance-matching.” Credit card payments are allocated in proportion to the balance on each account — in other words, bigger payments go toward cards with bigger balances, and smaller payments go toward cards with smaller balances.

The problem with the balance-matching repayment strategy is that it completely ignores the interest…

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