Let’s say you owe a bunch of money to several different credit card companies. Maybe you owe a little bit on this card, but a lot on that one. Or this card has a higher interest rate than that one. Does it matter which one you pay off first?
Yes, it does. But I’m going to recommend you rank those cards in a different way than most of the money gurus suggest.
This post has been written by our amazing staff writer, Jamie Jeffers.
Have you heard of the debt snowball method promoted by Dave Ramsey? I’ve got no problems with Dave! I enjoyed his class and his ideas. But his method of paying off cards from smallest to largest balance didn’t cut it for me. It wasn’t the motivation I needed.
(Derek’s Note: The snowball method definitely worked for me! But it’s always good to hear some other opinions to figure out what works for you!)
Other guys will tell you to forget about the balances. They want you to look at interest rates. You need to get rid of the card with the highest interest rate first and move on to the next highest after that. This will save you more money over time. That might be the motivation you need to start paying off debt and keep up with it for as long as it takes.
That isn’t always the case, though.
If you aren’t motivated to hang in there for the long haul, then it doesn’t matter what order you rank your cards in. They won’t get paid off the no matter how you rank them.
We tried these ways ourselves, and all it got us was a bunch of wheel spinning. Like hamsters, we were trying to do it the way they showed us, but getting nowhere.
…Until we did things our own way.
That’s when we finally realized that, in our case, interest rates and balances didn’t matter.
A New Way to Rank Your Cards for Repayment
Ok, so you should care a little….
Let’s get this part out of the way. If you have any means at all for getting away from a card with 20% or higher interest, do that first. Unless you owe a small amount on this card, it’s going to be tough to get anywhere with one of these in your rotation.
If you do owe a small amount on a high interest card like this, get it paid off today. Pull from your savings, sell something, or reign in your spending to get away from that horrid rate.
If the balance is too much for that quick method, look for a balance transfer offer at a lower rate with no fees. Discover Card has sent me offers to transfer a balance to their card at a 4.99% interest rate for a year. They charged me no transfer fees for that rate.
You might find that a 0% rate for a small fee is worth the transfer. Do some math to see how much the fees cost and you’ll know pretty quickly if it’s worth it.
For cards with an interest rate in the mid teens or lower, read on.
Do You Get Emotional?
I bet there is one card in your stack that you have an emotional attachment (or detachment!) to.
You hate that card because it reminds you of a medical bill or a stereo system that broke right away. Or you’re afraid of it, because the balance is enormous. Or you love it because that card represents your wedding dress.
Consider what those emotions are doing to your debt plan. People often avoid thinking about their debt altogether, because it’s too much to take in. Ignoring your feelings could tank your plan before you begin.
If you can psych yourself up into tackling the hard debt first, do it. That’s what we decided on. The card with the largest balance was scary. It seemed like an amount we could never pay off. I knew that if I could attack that card first, I would feel like a superhero. And that feeling would carry me through the rest of our long payoff plan.
But you might not think that way. Maybe the scary monster card is too much to think about, but you know you can pay off the smaller card. In that case, go with your gut feelings.
Do You Have the Proper Access?
If there is a card that you don’t have access to anymore, that might be a good place to start. If you can’t add to the debt even if you wanted to, seeing the balance go down month after month will motivate you.
An easy way to create a card you don’t have access to is to cut one up and not write the number down. (I always throw the pieces of the card away in different trash cans so they aren’t easy to piece back together by a thief.) Be sure to keep a close eye on your monthly statements to be sure no automatic or unusual payments are coming in.
Now Do This
Write down every credit card you owe money to. Next to each card, write down the balance and the interest rate. Then make any marks to indicate whether a card feels intimidating or emotional.
Rank the cards in the way that feels right to you. Which of those cards would feel the best to be finished with? Which card is the biggest burden, the statement you most dread receiving? Is that card holding you back from starting your debt free journey?
Do you need a quick win to keep you going? Or do you want to knock out the biggest balance first?
If you create a ranking system to pay off this debt that doesn’t make sense to anyone but you, do it anyway. You know yourself.
The worst thing that can happen is that you feel apathetic about all of the debt you’ve written down. If you don’t have any emotions about this debt, you probably don’t have what it takes to pay everything off. So dig deep and find the motivation to rank the cards in a way that inspires a drive to get rid of debt.
How did you rank your cards for repayment?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.