Is it better to pay off one debt at a time or start with the highest and go down? For anyone with multiple lines of debt, this is an age-old battle. There are solid arguments on both sides, but the reality of which is better may have little to do with the size of the debt at all.
The Small Debt First
Some argue that it is better to pay off the smallest debt line first. The argument is actually pretty straightforward. Once that debt is paid off, it is kept empty. Then, the amount added to that line is snowballed into the next one. When the small debt is paid off, it doesn’t add extra money to the pocket. It goes into the next smallest debt and so on. This snowball effect is good for morale because it means things are being accomplished, albeit slower and with smaller debt.
The Big Debt First
The fallacy of the above argument is interesting. Some argue that this approach is too slow and misses a big problem with debt repayment- interest rates. Interest rates are objectively higher in higher debt because there is more to charge interest on.
Both the small debt and the high debt have interest rates. If the rates are the same for both, the small debt is less punishing for interest. If the interest percentage is 10%, obviously the small debt would be less concerning. Because of this, the argument is that the high debt needs to be brought down more. It is recommended here that all debt should be brought lower and perhaps to an even level where the interest rate is not as staggering. Why pay off the small debt first when it has the lowest interest charge each month?
The argument stems from interest rates. To make the best strategy, find the card with the highest rate matched with its total. Balance the two aspects together for the best strategy. This repaying debt strategy is the most logical, especially if it provides a clear winner (high interest, high total). Go and see here for information on debt repayment and the best practices.