Should You Pay Off The Lowest Balance Or Highest Interest Rate Debts First?

by Hank Coleman

Use a debt snowball to pay off your debt.There are a couple of thoughts on how you should pay off your debt. Do you pay off your credit card and other debt by throwing all of your available resources and free cash flow at the debts with the highest interest rates? Or, do you attack the credit cards or lenders with the lowest balance first?

While many financial planners can argue both rationales, you should know the differences so that you can make the best decision for yourself based on your individual circumstances.

The Benefit Of Paying Off The Highest Interest Rates First

A vast majority of financial experts recommend people paying off the debt with the highest interest rate first. This make sense when you think about it.

If you had two debts of $10,000 each, one credit card with a 10% annual interest rate (Card A) and a second card that charges you 15% interest (Card B), it will make a lot of financial sense to tackle the debt with the highest interest rate first. In our example, Card A will charge you $1,000 in annual interest over the course of the next year while Card B will cost you $1,500 in interest.

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So, if you can pay off Card B first, then you have the potential of saving $500 that you would have spent in interest payments. That forgone interest payments can be then rolled into quickly paying down the rest of your debt.

The Thought Behind Paying Off Small Balances First

Dave Ramsey is one of the biggest proponents of paying off your smallest debt first regardless of the interest rate that the lender is charging you and saving your largest debt for last. This is one of the prime components of his debt snowball that he discusses in his book, The Total Money Makeover.

His argument is that paying off debt is just as much a mental exercise as it is a physical debt repayment. You need those easy wins of small loan balances to pump you up and get you excited about rolling those debt payments into new, bigger loans that you need to pay off next. It is quite a satisfying feeling of getting rid of small loans that are like ankle biters that you never have to deal with again.

Is one plan better than another? Maybe there is one that is better. But, what you should realize is that the best repayment plan is the one that you stick to and finish. It may not be the plan that saves you the most money in interest payments.

Attacking your highest interest debt will be all for naught if you fall right back into debt immediately afterwards or, even worse, if you never complete your debt snowball and stay in debt because you are continuously frustrated with your lack of success paying off your debt. The best debt repayment plan is the one that works for you and your family.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 586 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 3 comments… read them below or add one }

cashflowmantra

I totally agree that you should do what works best for you. When I calculated the difference between the snowball like Dave Ramsey recommends and paying the highest rate first, the difference was incredibly small as a percentage of total debt.

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Jacob @ My Personal Finance Journey

I personally advocate the highest-interest-rate-payment-first approach since it technically saves the most money. However, if someone feels they need to psychological pleasure of seeing a lower balance balance decrease, then the snowball method could be good too. It really is an individual specific decision.

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Lindsay Lee

The snowball effect is great for paying down debt fast but you have to be committed and I find that so hard. I paid off all debt last year but when I lost a huge chunk of income this year, I had to bust out the credit card to buy groceries. Now I am back up to $2000 in debt but I’m hoping that I will have a good Christmas this year (sales wise) and be able to pay it off again. By the Grace of God, I hope to start making more money again SOON and get all the debt out of my way so I can owe no man anything but love.

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