Credit Card Payoff Strategies: What Does the Research Say?

Attack smaller debts first, or high-interest debts? Let's take a look at the evidence.
Gregory Karp
By Gregory Karp 
Edited by Paul Soucy

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Just as no credit card is right for everyone, there's no universally correct order of paying off bills to become debt-free — despite conflicting advice from money gurus.

Yet, your choice could be crucial in determining whether you can get your balances down to zero.

The average American household carries about $136,000 in debt, if you include mortgages in the total, NerdWallet research shows. For households carrying credit card debt, those balances average more than $15,000.

Pay-down strategies have been the subject of considerable hand-wringing, evangelizing and even academic research. If you have debts on multiple credit cards or other revolving accounts, should you pay off the ones with the highest interest rates first? Smallest debts first? Some combination?

Each path to debt freedom has pros and cons, often stemming from arguments of right brain versus left brain, logic versus emotion, dollars versus sense of accomplishment.

In short: If you're certain you will get out of debt soon, pay off high-interest balances first. If you're weary and need motivation on the journey to debt freedom, try paying small balances first.

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Option 1: Paying high-interest debt first

The math-inclined will contend that the debt avalanche method is the obvious choice: If you eliminate the most expensive debts first, you'll pay less in interest. Paying an extra $100 toward a credit card charging 24% annual interest is mathematically superior to applying that same C-note toward a 19% interest card.

But that fails to take into account the motivation factor. Human beings are emotional beings who don't run on simple mathematics. What if your highest-interest balance is also your largest? You could get so discouraged while hacking away at a huge debt mountain that you stop trying. You could end up incurring finance charges over a much longer time.

Option 2: Knocking out small debts first

This is known as the debt snowball method, advocated prominently by book author and radio personality Dave Ramsey. The idea is to attack debts from smallest to largest, wiping out minor ones upfront to score some quick wins and get a psychological boost to continue.

Like dropping pounds quickly on a diet, it's encouragement to continue the discipline. Others liken the effect to playing an addictive video game. Game designers allow players to achieve success early before encountering more complex game play.

🤓Nerdy Tip

Regardless of the method you use to pay down debt, always make at least the minimum payment on every account. Failure to pay the minimum amount due will trigger late fees and could harm your credit score.

What academia says

The debt pay-down debate has drawn interest in recent years from academic researchers in the field of behavioral economics, which studies how people act with money.

For example, a study titled "Winning the Battle but Losing the War: The Psychology of Debt Management" appeared in the Journal of Marketing Research in 2011.

The authors found that people instinctively prefer the debt snowball — getting balances down to zero and feeling a sense of progress — rather than attacking highest-interest debt first. They dubbed the phenomenon "debt account aversion" and described it as "nonoptimal." People could win the battle by eliminating individual account balances, they wrote, but lose the war by paying more interest and potentially staying in debt longer.

A 2012 study in the same journal put a different spin on the topic, under the title "Can Small Victories Help Win the War?" Instead of using experiments, it examined records of about 6,000 real participants in a debt-relief program. Those debtors mostly had credit card debt, and many were on the verge of bankruptcy. The researchers found that the debtors were more likely to become debt-free if they tried reducing the number of debt accounts they had, rather than retiring debt with high interest rates. In sum, researchers found that a focus on paying off accounts was a better predictor of whether someone would eliminate debt entirely.

Yet another study in 2015, "Small Victories: Creating Intrinsic Motivation in Task Completion and Debt Repayment," looked at how and why that might happen. Using experiments, researchers found that people can, in fact, gain motivation from accomplishing mini-goals en route to accomplishing a larger one.

However, researchers across studies concede that justification for the debt snowball method breaks down when there are wide differences in the interest rates on debts. It's one thing when you have two credit card accounts with rates of, say, 15% and 17%. But when the difference is 3% versus 100% — not uncommon for a payday loan — the higher interest rate becomes just too punitive to justify not paying it first.

🤓Nerdy Tip

If you need temporary breathing room from high-interest credit card debt, a balance transfer to a lower-rate card or one with a lengthy 0% promotional period can help. Just be sure to take into account balance transfer fees. See NerdWallet's best balance transfer cards.

Combining the best of both

So, which is more important? Math or motivation? A seldom-suggested alternative is a hybrid. Pay off small debts first, up to a point, to build some motivation. Then pay the rest from highest interest rate to lowest so the finance charges don't harm you as much.

For example, start by wiping out all debts of less than $1,000 and then concentrate on debts with the highest interest. That might look like this: paying off a $97 bill from the dentist, a $156 bill on a store charge card and a $302 credit card bill, all with interest under 15%. Then turn your efforts toward a credit card account with a $6,400 balance at 19% interest.

And, of course, personal finance is often more personal than finance. Circumstances that have nothing to do with math or quick wins might sway your decision on which debts to pay. For example, it's probably a good idea to pay back your brother-in-law a borrowed $50 so you don't have to hear about it at Thanksgiving dinner.

🤓Nerdy Tip

After getting a credit card balance down to zero, it's generally best to leave the account open. Closing accounts can hurt your credit score by reducing your available credit and, eventually, the average age of your accounts. That said, if leaving the account open tempts you to fall back into debt, closing it might be the best option for you.

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