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Pay The Highest Interest Rate Debt Off First

The main reason people get too deeply into debt is because of credit cards. We know of one colleague who keeps a list in his wallet of the dates when all of his 12 credit cards roll over to the next month so he could start using them again.

A good first step is to check the interest rates that you’re paying on all your cards. Chances are that one of them has a higher interest rate than the others. If you find this to be true, you need to pay it off first. Then move on to the card with the second highest interest rate and so on.

The reason for this is because the amount you owe on the card doesn’t matter a lot if you’re paying a gigantic amount of interest.  This is because a high interest rate not only costs you every month, it compounds so that, in many cases, all you’re paying is interest and not reducing your balances at all. In some cases, you might find you’re paying as much as 30%, which means you’re paying a third more for everything you purchased using that card.

In short, what you need to do is muster all available funds and get rid of that debt.

It’s very tempting to pay off the card with the smallest balance first as this comes under the heading of instant gratification – you feel like you’re making good progress.  On the other hand, paying off the card with the highest interest rate can get discouraging. But paying off that card first is really the best idea.

Here’s an example of what we mean. Suppose you had two credit cards with identical balances of $5,000 but one had an interest rate of 29.99% and the other was at 9.99%. If you made a payment of $300 on the two cards, plus an extra $50, you would save $309 in paying them off. In fact, here’s what the difference looks like.

Interest owed when paying lowest balance first = $2,641
Interest owed when paying highest interest first = $2,332
SAVINGS = $309

As you might guess, paying off the credit card with the highest interest rate takes time and fortitude, as you won’t see your balance go down very quickly. But, as you have read, this strategy can save you a good deal of money.

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