This holidays are approaching and this is the time of year when many of us pull out credit cards and push away thoughts of how we will feel when the bills come later.
The author of “Most people are paying off their credit card debt all wrong — are you?” writes that researchers from England found, “People were simply splitting their payments up between cards more or less evenly, regardless of the interest rate. As a result, many were losing hundreds of dollars or more to interest payments annually.”
This surprised them since, as you’ll see, this may not be the best way to pay down multiple credit card balances. They thought that perhaps people were following the oft-quoted financial advice that one should pay off the card with the smallest balance first. The idea behind this is that the achievement of paying off one balance will motivate you to move on the larger debt.
However, it wasn’t clear that this is what people were doing either. It seems that they were doing something that has been labeled as “balance-matching,” which is paying an amount that corresponds to the card balance, no matter what they interest may be.
The article advises consumers to pay attention to the interest rates on their credit cards because you could pay less in interest if you put more money towards the credit cards with the highest interest. If you pay the minimum on all of your credit cards and then put the rest of the money you have for credit card repayment towards the card with the highest interest rates you will hand over less money to your creditors.
This advice doesn’t mean that you should never consider paying off a small debt first and it doesn’t mean that the “small debt first” advice is wrong. It is a reminder to pay attention. You have more control over your money than you think. You can control your spending and when you do use credit cards, you can opt to pay less in interest if you choose to do so. Why pay more to borrow than you have to?