What Is The Best Way To Pay Off Your Debt? Highest Interest Or Lowest Balance First?

I used to think that the best way to pay off your debt was to pay off the highest interest credit cards and personal loans first.  I mean it makes sense doesn’t it, that you’d want to get rid of the highest rate first since it’s costing you the most.

But the problem with this method is that you can get overwhelmed.

I know because I’ve been there myself recently (but let’s not go there, it’s kind of embarrassing).

During this time I actually found that it’s a much BETTER strategy to pay off your lowest balance cards and loans first and then work up from there.

And here is why.

MOTIVATION.

Every time you pay off a credit card balance and it reaches that magic zero, then you get a tremendous feeling of accomplishment.  A high five to your ego.

It then spurs you on to tackle the next lowest balance and pretty soon you’ve got the motivation and energy to pay off all of your debt much faster.

Now sure, you might end up paying a few extra dollars in interest, but that’s nothing to the feeling you get when you wipe out one of your debt’s completely.

If you feel like you are drowning in debt and are not sure where to start then just start with the lowest balance first.

So here is how to use this method:

1. Write down a list of all your credit cards, store cards and student/personal/car loans that you have with their interest rates and the remaining balance on them.
2. Also make a note if they have a minimum payment that you have to make since sometimes car loans and the like have a set monthly payment that you need to pay.
3. Now put a big star next to the lowest balance.  That’s the one you are going to wipe out first.
4. On your next pay day, pay the minimum or lowest amount you can to the debts that don’t have the star.
5. Now pay the maximum amount that you can possibly afford on that card or loan that has the lowest balance.
6. Knowing how much you can afford to pay off it, you can now work out how many more pay check’s it will take to reduce it to zero.
7. But a big star on the calendar every time you make another payment and get one step closer to paying it off (gold stars have extra magical motivation – I’m sure of it).

That’s it.  Rinse and repeat until you get to zero balance.  Do a happy dance.  Start again with the next lowest balance.

And that my friend, is how to pay off your credit card debts (and other debts) without going crazy.

Or be crazy if you want.  Who am I to judge?