Should I Pay Off High Interest or High Balance Credit Cards First?
Should you pay off high interest or high balance credit cards first? Find out as Money Girl answers this listener question.
Laura Adams, MBA
Q: I have credit cards with wildly different interest rates, such as 9.74% and 25.99%. I think I should pay off the highest interest card first; however, one of the lower interest cards is maxed out. I understand that having a balance above 30% of the available credit limit on a card can hurt my credit score. So what’s more important to focus on first, high interest rate or high balance cards?
A: This is a great question about two important goals: 1) getting rid of high interest debt so you can save money on interest and 2) reducing debt so you can build or maintain good credit.
Keeping your outstanding credit card balances below 20% to 30% of your available credit limit is key for maintaining good credit, no matter the interest rate charged. In Credit Utilization: What It Means for Your Credit Score, I answer common questions about this important ratio, but here’s an example:
Let’s say you have a credit card with a $1,000 credit limit. To maintain a healthy credit utilization or ratio, never charge more than 30% or $300 on that card. If you need to charge more, you’ll be better off with multiple cards that each carry 20% to 30% of the credit limits, than having one card that’s maxed out.
However, even though building credit is important, cutting your interest expense is even more important. So, given the choice I recommend focusing on your higher interest credit cards first—even if they have balances below the 20% to 30% guideline.
Getting rid of high interest debt should always be your priority because it saves you the most money as you pay it off. That savings helps you pay off the next highest interest card even faster and so on.
To learn much more about credit utilization and smart strategies to build credit fast, download the Credit Score Survival Kit. It’s a free video tutorial I created to help you repair and maintain excellent credit for life.
Other Links You Might Like:
6 Ways to Pay Off Credit Card Debt
What You Should Know About Credit-Based Insurance Scores
Does Canceling a Credit Card Hurt Your Credit?
How to Make Decisions About Personal Finances
Connect with me around the web on Facebook, Twitter, and Google+
Click here to Download 2 Free chapters of Money Girl’s Smart Moves to Grow Rich
Get the Money Girl Book!
Looking for more money advice or a great gift? Pick up a copy (or several!) of Money Girl’s Smart Moves to Grow Rich. It tells you what you really need to know about money without bogging you down with what you don’t. Get the ebook version or paperback at your favorite book seller today!
Credit Cards Stack image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.