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.