Debt Smarts: Which credit card should I pay off first?

Since I wrote the column on paying off credit cards using the snowball effect, I've received numerous questions asking whether it's better to pay off the cards with the lowest balance first or pay off the cards with the highest interest rate first. Personally, I think it's best to pay off the highest rate cards first, no matter what the balance is on the cards. I know others believe it's best to pay off the cards with the lowest balances and then work up to the ones with the highest balances no matter what the interest rate, getting rid of payments to build up that snowball as quickly as possible.

Actually the best way to get started using the snowball effect is to transfer all your high interest rate credit card balances to cards with the lower interest rates, if that is an option for you. For example, suppose you have $5000 on a credit card that charges19.99% interest and you have $2,000 on a credit card that charges 9.99% interest. If you can reverse that and transfer $3,000 to the 9.99% interest card, do that before you start working on your payoff. Many cards even allow you 0% interest on the first six months after transfer, which helps even more.

But even if you can't transfer those balances, you're still better off paying off that higher interest credit card first. If you have $5,000 on a card charging 19.99% interest you are probably paying about $84 in interest per month and the minimum payment is probably about $100. The $2,000 card at 9.99% interest probably has an interest charge of about $17 per month and a minimum payment of about $20 per month. Since most cards calculate interest based on daily compounding, interest payments could be higher than those I've calculated. But we'll use to keep things simple.