Is the 'small victories' debt strategy a real win?

Paying off small balances first might be a victory for those in credit card debt—or lead to defeat.

A forthcoming Journal of Marketing Research study found that meeting small goals motivates people to reach a larger goal. Participants were apt to complete a tedious task (entering 10-character strings of code) faster when they could tackle quicker segments first, with their motivation increasing as they got closer to completing the task. Researchers said it carries over to debt repayment strategies, where the "small victory" of paying off a card balance can motivate consumers to dig out of debt faster.

Co-author Joanna Lahey, an associate professor of economics at Texas A&M University, said the study was a way of exploring the "snowball" method of paying off debts from smallest to largest. However, she said, that strategy is counter-intuitive. "It makes no sense," she said. "Why would you not order things by interest rate?"

Changing the task to one that isn't financial in the study let the researchers see if the snowball method is still motivating when it isn't tied to financial advice. "With the debt framework, people know what they're supposed to choose," she said.

No doubt about it, Americans could use some motivation to reduce debt. Among those households with credit card debt, the average owed is $15,863, according to a May analysis from NerdWallet.com using government data. That's up 2.37 percent from a year earlier.

The Texas A&M research isn't the only study to reinforce the effectiveness of the so-called snowball or small victories method. A 2012 study of debt-payoff strategies from Northwestern University's Kellogg School of Management found that consumers paying off small balances first were more likely to have eliminated their entire debt than those focusing on other strategies.

But it's a potentially dangerous strategy for the wrong consumer, said Odysseas Papadimitriou, chief executive of CardHub.com. "It's the strategy that's going to leave you worse off," he said. Tackling the cards with the highest interest rates first eliminates debts faster and reduces the amount paid in interest overall.

Knocking out a small balance can also generate false optimism. That small victory may make shoppers feel like they have some spending wiggle room, said Papadimitriou, even though they still have other, bigger balances left to tackle.

Leahy agrees: Personality assessments conducted as part of the Texas A&M University study found that people who are more risk averse and who have more self control were more apt to choose and be successful with the snowball method. "It looks like this kind of repayment works best for people who are in debt … through no fault of their own," she said. Consumers are still likely to come out ahead by focusing on higher-rate cards first, especially if they have cards with very different rates.

Ultimately, the "right" payoff strategy comes down to you. "A lot of it is psychological," said Curtis Arnold, founder of CardRatings.com. "It's not a one-size-fits-all approach. It's what motivates you." Start by making a list of all your credit card debts, sorting by card and interest rates. Consider what the best strategy might be based on those details and how much you can afford to pay each month.

As you zero out balances, think about removing any temptations from that victory. "If there's going to be at any point the smallest temptation [to resume spending], you cut up the card," he said. Or better yet, close the account, even if it dings your credit score.

Another tool to consider: zero-percent balance transfer offers. Used wisely, they can save hundreds or even thousands of dollars in interest, said Papadimitriou, although choosing one requires balancing factors including fees, timeline and monthly contributions. Currently, two cards—Chase Slate and Capital One QuicksilverOne Cash Rewards—have no balance transfer fees, according to CardHub.com. Some of the longer offers span 15 months, with the Citi Simplicity card offer stretching to 21 months.

Regardless, aim to have the debt paid off before the terms ends. "It's a huge mistake to assume at the end of the introductory period you're going to roll into another zero percent," he said. (Such offers are likely to dry up should the Federal Reserve raise interest rates.)

Ideally, any debt-payoff motivation will extend to healthier credit habits. Work on building an emergency fund as you pay off debt, said Papadimitriou, and focus on not spending more than you can pay off in a given month. "If you don't learn to budget and spend within your means, you're going to be right back where you started," he said.