Question: Paying off credit card debt.

A BuyandHolder

Answer:

Dear BuyandHolders,

Last week we outlined a number of ways you can boost your FICO credit score which in turn makes it all the more likely you will not only qualify for a loan but for one with low interest. Click HERE to read.

Several of our recommendations involved paying off credit card debt. But that raises the question, which card to pay off first? There are two schools of thought…

Thought #1: Paying off highest rate card

It seems like a no-brainer, in fact that you should pay off your higher-rate cards first. And generally that’s true. To find out how much you will save by doing so (while continuing to pay off the minimums on your other cards) as well as how long it will take, use Dinkytown’s “Credit Card Roll-Down Calculator” at:
www.dinkytown.com/java/DebtRolldown.html.

This particular calculator will also tell you how much you’ll save on interest if you pay just a little bit more each month on your highest rate cards. For example, let's say you have balances of $3,000 on an 18.9% card and $4,000 at 17.5% -- if you put an additional $25 faithfully toward the highest interest debt, you'll save $2,416 in interest and roll down your balances to zero in 2 years and 5 months, instead of 11 years and 8 months!

Thought #2: Paying off lowest rate card

There's another school of thought, however -- that you should pay off your lowest balance first -- just to give you the boost of erasing one of your balances more quickly. Run the numbers through the calculator to find out how that would affect your savings. For example, if you had a balance of $3,000 on an 18.9% card and $1,000 at 17.5%--and put that extra $25 toward the lower balance—you'd only wind up paying $8 more in interest to retire that balance first. It might be well worth that small amount to see at least one zero balance a little sooner!

In the end, the goal is to reduce your debt to no more than 10% of your credit line on any single credit card. Like diets, one size doesn’t fit all—choose whatever plan you can stick to until the debt is gone.