Which Credit Card Should I Pay Off First?

If you worry about the amount you owe on your credit card, you are not the only one. Almost 50% of Americans carry credit card balances, according to a recent Bankrate survey. Try not to beat yourself up—those balances can creep up on all of us. It might be down to a combination of factors, including medical bills, job loss, unexpected car or home repairs, and high living costs. 

What matters is how you're going to manage that debt moving forward. Deciding which credit card to pay off first is already a big step. 

It's also worth zooming out and exploring other debt relief routes. You can use a combination of strategies. Depending on your situation, it's worth exploring how debt consolidation, credit counseling, or debt settlement could help. 

Deciding Which Credit Card to Pay Off First

If you have a card that's in collections, tackle this and any other past-due accounts first. After that, you might prioritize the card with the highest interest rate. Or go for a psychological win by focusing on the card with the lowest balance. 

But first, you need to know where you stand. Make a list of what you owe on each card. This should include the interest rate and your monthly minimum payment. 

Next, look at how much you earn vs. how much you spend on essentials. Use this to work out how much extra you might be able to put toward debt repayment. 

The idea is to keep up with the minimum payments on all the cards and put any extra cash toward one balance. This process could take time—it is not a crash diet. Try to be realistic and set achievable debt repayment goals. 

Debt avalanche: Focus on the highest interest rate first

There's a reason people talk a lot about the high interest costs of credit cards. Annual credit card interest rates—APRs—can be around 20% to 25%. That adds up fast, especially as credit card interest compounds daily.

For example, let's say you have a balance of $20,000. At a 25% APR, that would cost you over $400 in interest each month. Rule number one of successful debt repayment is to reduce your interest costs. The less you pay in interest, the more impact your payments will have on your balances, and the sooner you could put your debt behind you.

The debt avalanche method does exactly that. First, pay the minimum on all debts. Doing this protects you from the negative consequences of late payments.

You put your extra cash toward the card with the highest interest rate. Once you've paid down that balance, you switch your attention (and the extra cash) to the next-highest interest rate, and so on. 

Main benefit: The debt avalanche method could cut your total interest costs. 

Main drawback: If your most expensive balance is a big one, it can take a long time to get to your first payoff. This can make it tough to stay motivated.

Debt snowball: Focus on the lowest balance first

The debt snowball approach involves paying off the card with the lowest balance first. Let's say you have one card with a balance of $500, another with a balance of $1,000, and two with balances of over $3,000. Pay down the card with a $500 balance first, then focus on the $1,000 balance before tackling the largest amounts, even if your bigger debts have higher rates.

Each paid-down balance builds momentum and the amount you’re paying gets bigger, a bit like a snowball rolling downhill. There's a sense of accomplishment that comes from wiping out the smaller debts. This builds confidence for the bigger challenges. 

Main benefit: Quick wins can boost motivation and help people stick to their debt-repayment plan.

Main drawback: You could pay more in total interest as this system does not take APRs into account. This can also mean the whole process takes longer. 

Balance Transfer Cards and Debt Consolidation

If you want to pay off your credit card balances, prioritizing payments is only part of the picture. Credit card debt consolidation and balance transfer credit cards can also help reduce your interest costs. 

Debt consolidation involves combining multiple debts into one loan, often with a lower interest rate. Rather than deciding which balance to pay down first, a debt consolidation loan could help you simplify your debts into one—often lower—monthly payment. 

Balance transfer credit cards are a form of debt consolidation. Some credit cards come with a 0% introductory interest rate for a set period, usually between six and 18 months. It isn't a magic bullet—not least because you normally have to pay a balance transfer fee of 1% to 5%. Also, once the promotional APR ends, you’re on the hook for the card’s regular interest rate if any of your balance remains unpaid. 

The biggest risk here is that it can be easy to get even further into debt. If you charge your cards back up after you consolidate your existing debts to a new loan, you could wind up in even more debt than you have now. Debt consolidation needs to be part of a repayment plan.

How to Handle Overwhelming Credit Card Debt

Credit card debt can become overwhelming. When you look at your finances, you may find you're not able to cover your minimum payments, never mind put extra toward your balances. 

There are still steps you could take, including credit card counseling. This can help you explore options with an expert and see whether a debt management plan might be appropriate. 

Another option is a credit card debt settlement agency that can try to settle your debt for less than you owe. You, or a company like Freedom Debt Relief, negotiate with creditors to accept less than the full amount you owe and forgive the rest. Debt settlement could involve fees, potential tax consequences, and credit score damage.  However, it may be the right choice if you’re overwhelmed with debt and you can’t afford to fully repay what you owe.

Whatever route you take, action is what matters most. The sooner you take steps to deal with your debt, the sooner you can minimize the negative outcomes.