Even though you put most of your effort into paying off one credit card, you should continue to make minimum payments on all your other credit cards to avoid late payment penalties and to keep your accounts in good standing. The tough part is figuring out which credit card you should focus on paying off first.
The Two Basic Ways to Pay Off Credit Cards
There are two basic ways to pay off credit cards: either by paying off the credit card with the highest interest rate first or by paying off the one with the lowest balance first. To decide which strategy is better for you, think about whether you’d like to save money on interest or get rid of entire credit card balances quickly.
Save Money on Interest
If you’d rather save money on interest, then pay your credit cards starting with the highest interest rate balance first. Paying off the highest interest rate balance first may take less time and allow you to save money on finance charges, especially if your highest interest rate credit cards also have higher balances. Make a list of your credit cards, ranking them in order from highest to lowest interest rate. Then, pay off the credit card with the highest interest rate first by making high lump sum payments to that card each month. Once you pay off the credit card with the highest interest rate, move on to the card with the next highest interest rate. Repeat that process, until all the credit cards have been paid off. Also, check with your existing credit card companies since one of them might offer a 0% or near 0% balance transfer from another credit card. If you have a zero balance on that card, you can transfer the high-interest credit card balance to the existing card without the need to open new credit. If the existing card isn’t paid off yet, you can pay that one off first and then transfer the other high-interest balance to the existing card at the 0% rate.
Pay Off an Account Faster
If you wish to get rid of the credit card balance quickly, then pay your credit cards starting with the lowest balance first. When you pay off smaller balances first, you feel like you’re making more progress, since you’re knocking out an entire credit card balance. This progress can keep you motivated to stay diligent with paying off your accounts. For example, if you have a $500 credit card balance and $500 extra in a paycheck, bonus, or tax refund, you could pay off an entire credit card and have one fewer account to think about.
Exceptions to the Rule
Depending on your credit cards, there may be some exceptions. For example, if you’ve opted out of an interest rate increase and you close or cancel your credit card account, you can be required to pay off the balance within five years. All things being equal, paying down the balance will avoid hurting your credit score. If you have balances with deferred interest, pay off those balances to avoid being hit with all the interest charges at the end of the promotional period. Keep in mind that interest rates can change, particularly if you have a variable APR or get hit with the penalty APR.
Is One Method Quicker?
When it comes to the amount of time required to pay off your credit card balances, there isn’t a huge difference between the two methods. Paying in order of interest rate will typically allow you to pay off your accounts a few months earlier than paying in order of balance, and you’ll pay less in interest charges. You don’t have to choose either of those two methods. You can pay off your credit cards in whatever order makes you happy. You can alphabetize them by credit card issuer or get rid of the balances on cards you’re not using anymore. The ultimate goal is to pay off your credit card balances by making a lump-sum payment to one credit card each month until that balance is repaid. In the meantime, be sure to make minimum payments on all your other credit cards.
