Debt Repayment: The Feel-Good Way

QUESTION: I understand that one should payoff the credit card with the highest interest first, but I have a cardat 12 percent with $1,500 of debt and a card at 18 percent with $6,000in debt. Since the two cards have such different amounts, and $1,500 isa relatively small amount of money, would it look better if I paid offthe smaller card first?

ANSWER: I recently started going to mylocal gym to shed a few pounds that I picked up on the good cruise shipMercury. The trainer I am working with crafted a program that will notonly lose the inches, but that fits me personally so that I am morelikely to actually complete the program. Your situation is similar, asyou are concerned not only about how your financial figure looks toothers, but getting it in shape your way. My experience tells me thatwhether it be debt or doughnuts, a reduction program has to make senseto you.

Most experts would advise you to pay off the highest interestrate card first so you can avoid paying a huge amount of money ininterest charges. This can occur if you are only making the minimumpayment on a high interest rate card for an extended period of timewhile putting your free cash flow toward paying off another card.

Keep in mind that the ultimate goal of most people in creditcard debt is to get rid of it and not find themselves in the samesituation again. Motivation is the key. Some people choose to tackle asmall balance first. Seeing a credit card statement with $0.00 in thefinance charge box can be just the right motivation to keep going andpay off the others. If that means they will pay slightly more ininterest charges on other cards, but by paying off one balance theywill commit to paying off all their balances, then I'm all for it. So,if you find that you are having trouble committing to paying off yourdebt and it would help to see the $1,500 balance gone, by all means goahead and pay it off first and then tackle the $6,000 balance. Theimportant thing is to follow through with both.

As far as your question regarding how it will look, I'massuming you are asking how it will look on your credit report andspecifically how it will affect your credit score. The most importantthing to remember when paying off credit card debt as it pertains toyour credit report is to avoid closing long-standing accounts once theyare paid off. Two negatives can occur if you do. One, the account maybe the oldest established account on your report, and if closed willcause your score to decrease because your length of credit history willbe shortened. Two, by closing the account you lose access to anavailable credit line and that will push up your ratio of debt toavailable credit. Which one you pay off first shouldn't make a bigdifference.

Whatever strategy you use to pay down/off your credit carddebt, remember to always pay on time and don't add any additionalcharges to the accounts until you get to your goal, if you can avoidit. As for me, the question is whether or not to have the brownie thatcame with my lunch!

Good luck!

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