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Pay Down Your Debt Challenge

Which Credit Card Should You Pay Off First?

You can tackle high-interest rates or high balances. Here's what to expect when you take either approach

When personal finance gurus advise you to pay off high interest rate debt first, they assume that:

  • the interest rates on your credit card are high
  • you are bothered by your credit card interest rates
  • this strategy is the fastest route to paying off your debts
  • you'll save the most amount of money by using this technique

Unfortunately, for scores of those who are deep in debt, these suppositions are flat-out wrong. Here's why.
As of June 2011, the prime rate in the United States stood at 3.25 percent. Consequently, people with good credit are now paying an average of 10.8 percent for low-interest cards, while the typical credit card with a variable interest rate currently averages 14.4 percent, according to By comparison, the prime rate peaked at 21.5 percent in December 1980, and in the mid-1980s, credit card interest rates averaged a record 18.75 percent.
So even though most financial advisers make the erroneous assumption that all consumers are upset about high interest rates, often that is not the case at all.

So here's a better way to become debt-free: think about what's really bugging you, and then choose a payoff strategy that attacks your area of pain. This will give you both the emotional satisfaction and the economic reward of paying off your debts. As a result, you'll stay motivated enough to stick to your repayment plan. In the end, this is what will help to most quickly have zero balances on your credit card statements.

There are three primary payoff techniques you can select, based on what ails you most.

1. Deal With Killer Interest Rates
If you're facing exorbitant interest rates and they're killing you, then yes, by all means, concentrate on the high-rate debt first. This may be the case if you have a wallet full of store-brand cards, from retailers. These cards typically carry much higher interest rates than national brand cards, such as Visa, MasterCard or Discover.

Also, if you've had credit problems in the past, or if you've been recently late on your card payments, you may be stuck with "default" interest rates, which can easily top 22 percent and can sometimes run as high as 30 percent. If any of these scenarios describe you, and if you're losing sleep at night because of your high-interest rates, then you should pay down those debts first.

Next: Tackle cards with high balances. >>

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