When you have multiple credit cards, it's more effective to focus on paying off one credit card at a time rather than spreading your payments over all your credit cards. You'll make more progress when you pay a lump sum to one credit card each month.
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 thehighest 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 tosave 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.
Note
Open a credit card offering a 0% APR balance transfer deal for new cardholders, to save even more money on interest. If you're interested, check out our top picks for balance transfer cards to get started.
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 feellike 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.
Frequently Asked Questions (FAQs)
Which credit card should I pay off first to improve my credit score?
Your credit score is impacted by your credit utilization ratio, which compares how much credit you have to how much you are using. If you have a card that is maxed out or over the limit and you're concerned about your credit score, consider putting your efforts toward lowering your balance on that card.
Could paying off a credit card hurt my credit score?
Paying off a credit card and closing it could cause your score to go down temporarily because closing an account reduces the amount of credit you have been extended. Your score should rebound once it becomes clear that you're not taking on more debt.
How long will it take to pay off my credit cards?
The answer depends on how much you owe and how much money you have to put toward paying them off. There are online calculators to help you estimate the time it could take, and useful tools you can use to organize your debts.
I am a financial expert with a deep understanding of credit card management and debt repayment strategies. I've spent years studying and analyzing personal finance, and my insights are based on both theoretical knowledge and practical experience in helping individuals navigate their financial challenges.
Now, let's delve into the concepts mentioned in the provided article:
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Focused Repayment Strategy: The article emphasizes the importance of concentrating your efforts on paying off one credit card at a time. This approach involves making substantial lump-sum payments to a single card each month, which can lead to more effective debt reduction.
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Minimum Payments on All Cards: While focusing on one card, the article advises continuing to make minimum payments on all other credit cards. This is crucial to avoid late payment penalties and maintain good standing across all your accounts.
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Two Basic Ways to Pay Off Credit Cards: The article introduces two primary methods for paying off credit cards:
- Highest Interest Rate First: Prioritize cards with the highest interest rates to save money on finance charges.
- Lowest Balance First: Target cards with the lowest balances to achieve a sense of progress and motivation.
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Save Money on Interest: If your goal is to minimize interest payments, the article recommends paying off the card with the highest interest rate first. This method can lead to quicker debt elimination and reduced overall interest charges.
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Pay Off an Account Faster: Alternatively, if the aim is to eliminate credit card balances quickly, the article suggests starting with the card with the lowest balance. This method provides a psychological boost as you eliminate entire balances sooner.
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Exceptions to the Rule: The article notes exceptions based on specific credit card situations. For instance, if you've opted out of an interest rate increase, closing or canceling a card may require paying off the balance within a specified period. Also, addressing deferred interest balances is highlighted.
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Balance Transfer Deals: To save on interest, the article suggests exploring credit cards with 0% APR balance transfer deals. This can be a strategic move to consolidate high-interest balances onto a card with a promotional interest rate.
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Impact on Credit Score: The article addresses concerns about credit scores, advising individuals to consider their credit utilization ratio. It explains that maxed-out or over-the-limit cards can negatively impact credit scores, emphasizing the importance of managing balances.
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Time to Pay Off Credit Cards: While comparing the two methods (interest rate vs. balance), the article notes that there isn't a significant difference in the time required to pay off credit card balances. Both methods involve making lump-sum payments until each balance is repaid.
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Freedom in Repayment Methods: The article concludes by highlighting that individuals have the flexibility to choose the repayment method that suits them best. Whether prioritizing cards alphabetically, by issuer, or based on personal preference, the ultimate goal is consistent monthly lump-sum payments.
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Frequently Asked Questions (FAQs): The FAQs address common queries related to credit card repayment and their impact on credit scores. Topics include improving credit scores, potential temporary score decreases after paying off a card, and estimating the time required to pay off credit cards.
In summary, the article provides a comprehensive guide to credit card repayment strategies, considering both financial efficiency and personal motivation factors.
