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The Budget Doctor Q&A

Question: On one of the biggest media sources we have as American's, we were given the advice that paying the highest interest rate cards off first will not provide enough psychological assistance to take the debt down. Instead the recommendation was made to pay the lowest balanced card off first to reduce one by one so that all the expensive fees (over balance fees, over cap fees, late fee, etc.) could be eliminated. What are your thoughts?

Answer: Thanks for writing. I too have heard some fairly reputable advisors suggest paying off the smallest balance card first. I know that paying off anything except the highest APR card first is bad financial advice. I have computed any number of examples and can assure you that you save the most by paying off the highest APR card first. As to the psychological advantage, I have never found a study that purported to claim that paying off smaller balances in anyway provided a psychological benefit. I have not, however, spent hours reviewing that literature. The point that fees are somehow eliminated or reduced by paying off the smallest balance is pure silliness. The APR on the statement reflects all fees by laws. If you pay off the highest APR card you are saving money and fees, unless you are failing to even make the required minimum payment on the other cards. Certainly you must make that minimum payment and keep all balances below the maximum. Work on that highest APR card first and you will save money. If someone claims otherwise, ask them to show you the math.

Good Luck! The Budget Doctor