Household debt continues to rise and with multiple debts and multiple credit cards to pay, it can be a challenge determining how to prioritize payments. If you have debt on multiple credit cards it may be tempting to pay down the largest balance, but that may not be the best approach.
You will want to pay the minimum payment on all your credit cards to ensure that you don’t get hit with penalties and fees, but if you have cash left over, you’ll need to decide where the excess payment should go.
Although it may seem like paying down your highest balance is the best option, but you’re better off paying down the card with the highest interest rate.
The reason behind this is that regardless of the balance, you will save the most in interest costs by putting your remaining cash on the highest-rate card.
If you pay $100 on a credit card that charges you 10% interest a year, then you’d be saving $10 a year in fees by paying that card. However, if another card charges you 20% interest, then you’d save $20 a year by choosing to apply your payment towards that card instead.
Regardless of what the balances look like, you want to consider your overall interest rate since that is what you are paying perdollar, and tells you how much you’ll be saving per dollar by paying that debt down.
Ultimately the balance is of minimal importance when considering when to apply payments, because if you pay the smaller balances off then you simply progress onto the next card, and so on.