New Research On The Best Way To Pay Off Credit Card Debt

Paying off credit card debt is hard at the best of times, let alone while paying rent in an unsteady economy. Researchers from the Harvard Business Review have been conducting studies to find the quickest, most effective way to pay off credit card debt and the answers may surprise you. Here’s what they have found to be the most effective way to pay off credit card debt:

Pay off cards with lowest balances first

While it may be the most logical and sensible thing to pay off higher debts or interest rates first, we humans are not entirely logical, rational creatures. We need to feel motivated and achieve a sense of accomplishment for continual, ongoing action. Research shows that people paying off lower balances first get out of debt faster, as they can see the results of their saving.

Now, this does not mean that you stop paying minimums on all your other cards. You just dedicate all your extra payments to the card with lowest balance first and when that is down to zero, you then move to paying off the next lowest balance.

Don’t cancel the paid-off card

After the card is paid off, don’t use it again, but don’t cancel it either. Cut the card up, so you won’t be tempted. If you cancel the card, it may hurt your credit score because one of the key points in the score is your credit utilization and the higher percentage of your credit limit that is used, the bigger the ding on your score. If the card is still active but unused, its credit limit will have 0% utilization and will help your score. (If you doubt your willpower and feel you must cancel the card, make sure it is reported to the credit bureaus as “cancelled at the request of the customer.”)

Good financial habits require more than just discipline or even hard work. Mindset is key to making any kind of positive change in your life, and this is especially true where money is concerned, which tends to be one of the trickiest, stickiest, scariest, most sensitive subjects for most of us.

Best-selling author Dave Ramsey, calls this the “Snowball Effect”, writing for his website:

“Mathematically, it makes sense to pay on the debt with the highest interest rate first. After all, doesn’t that save you the most money? Maybe, but it’s more important to pay your debts in a way that keeps you motivated to keep going until you’ve wiped them all out. If you begin with the biggest one, you might think you’re not making fast enough progress, lose steam, and not finish the job.”

Ultimately, getting out of credit card debt is about steady, prolonged effort and good financial habits. A positive mindset and a feeling of empowerment will go a long way towards keeping you motivated and working towards your goal of a debt-free life. It’s not as hard as you think.

What are some other financial topics you struggle with, you’d like to see written about? Let us know in the comments, or get in touch via Facebook or Twitter!


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J Simpson

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J. Simpson is a prolific freelance writer, blogger, and musician, based out of Portland, Or. He is fascinated with every aspect of modern living, and how to make the best of it, frequently writing about business, technology, and spirituality, as well as every aspect of culture - music, art, literature, cinema, TV, and comics. For more from J., follow him on Twitter at @for3stpunk.

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