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# You may be paying off your credit card debt wrong—here’s the best way

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You may be paying off your credit card debt wrong—here’s the best way

When looking at their credit card bills, most people only pay attention to one number: the total amount they owe. But if that's your priority, you're probably not getting far in eliminating your debt.

After analyzing data from 1.4 million credit card holders in the U.K. who use more than one card and don't pay off their entire balance every month, researchers in England found that people overwhelmingly choose ineffective strategies for paying off their debt, Christopher Ingraham reports in The Washington Post.

Mathematically, the most effective way to eliminate debt is to follow the avalanche method, in which you list your debts from highest to lowest by interest rate. Pay the minimum balance on each, then dedicate as much extra as you can each month to the one with the highest interest rate.

However, in the study, researchers realized people are doing what's known as "balance-matching," in which the amount they pay per card per month is proportional to the total amount owed on that card.

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Here's how Ingraham breaks it down:

Say a person owes \$10,000 on one card and \$5,000 on another and they have a total of \$1,500 to put toward both cards in a given month. Chances are they'll pay down \$1,000 on the larger card and \$500 on the smaller one, regardless of interest rates or any other concerns.

While this system is better than only making the minimum payment, it still caused debtors to rack up a substantial amount of interest. The average household with two credit cards was throwing away \$90 per year on interest payments, while some with five or more cards were losing over \$1,000 annually.

However, while switching to the avalanche method would make sense from a numbers perspective, it's not always the best choice. In 2016, researchers for the Harvard Business Review found that the snowball method actually proved to be the most effective strategy.

Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress.
Remi Trudel
HBR researcher

The snowball method, which has been popularized by "The Total Money Makeover" author Dave Ramsey, prioritizes your smallest debts first, regardless of interest rate. To try it, start by listing out all of your debts, smallest to largest. Pay the minimum balance on each one, except the smallest. For that one, dedicate as much cash as possible each month until it is repaid. Then move on to the second-smallest debt.

The idea is that you'll gain momentum by watching debts disappear — as you would watching a snowball grow bigger and bigger — and that will motivate you to continue.

"Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people's sense of progress — and therefore their motivation to continue paying down their debts," Remi Trudel, one of the researchers, writes for HBR.

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The snowball method worked for Derek Sall, who paid off more than \$100,000 in seven years and became debt-free by 30.

"It's emotion that got you into the debt, so it's emotion that's going to get you out," he explains. "You want to pay off your smallest debt and have those victories, so it's a motion to pay off the next one, and the next one, and the next one."

At the end of the day, the best strategy for paying off debt comes down to which of these two options works best for you.

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