# Will be debt Free in 3 years — What order should i pay off my cards?

I have budgeted to the point where i can close all credit cards i have in close to three years from now.

My question is, should I simply pay 1/3 to each card (will be over minimum payment on all)

OR

should i pay the most i can to one card and minimum to the remaining? Essentially taking out the cards one at a time.

Thanks!

I would pay the minimum on two cards and then pay as much as you can to the credit card with the highest interest rate. After taking out the highest interest credit card, I would then pay as much as possible to the card with the 2nd highest interest rate while paying the minimum on the 3rd card. This will give you the shortest pay-off period by taking out the highest interest rate first.

## Example

• Card A = 20% interest rate and \$5,000 balance
• Card B = 22% interest rate and \$3,000 balance
• Card C = 12% interest rate and \$2,000 balance

With the above example, I would pay as follows:

1. Pay the minimum monthly amount on cards A and C, while paying as much as possible on card B until the \$3,000 balance is paid off.
2. Pay the minimum monthly amount on card C, while paying as much as possible on card A until the \$5,000 balance is paid off.
3. Pay as much as possible on card C until the \$2,000 balance is paid off.
• I agree, except I would focus on the lowest balance. It will increase the amount of money that you'll actually owe, but it's big mental reward that is worthwhile. – duffbeer703 Oct 1 '10 at 9:49
• See if you can transfer the balance on the two higher-rate cards to the lowest. Even if moving #1 to #2 (if #3 won't do it), you'll still save money. – kajaco Oct 1 '10 at 16:19
• @kajaco You'll want to consider the balance transfer fees, though. It might be cheaper to just focus on paying off the higher rate cards rather than transferring. Depends on fees and balances, though. – a_hardin Oct 1 '10 at 17:39
• Going to do it this way Matthew. Just adjusted everything so that of my budget for paying these off, the lowest interest rated cards get minimum payments and everything left over goes to the highest. THANK YOU! – Paymaster Oct 4 '10 at 5:54

Pick the order that is most exciting for you! They key to the process is to keep at it and you should use every trick you can find to make sure you stick with it. Three years can feel like a very long time.

The debt snowball, while not the mathematically maximized order, is set up to give you milestones along the way and give them to you early: the first debt you pay off is the smallest so you get that sense of accomplishment as soon as possible. And when you roll that old payment into the next, you see the larger debt disappearing faster (the snowball effect!).

Other folks get that satisfaction from maximizing their paydowns and focusing on the highest interest balance first, no matter how small of an advantage there is. If that is what keeps you working at it, do it.

Personally, my second mortgage is the one that bothers me the most, even though its not the smallest or the one with the highest interest rate. Its the one that gets under my skin and irritates me. Paying extra money towards that one just makes me feel good and I want to keep paying more!

You should still do the math to know how much more you are paying to make your choice; knowing that information may change your answer. If I had credit card debt at >22%, that would most certainly be where all my extra cash would go since I can't stand interest rates that high. My point is that you should pick what works for you given all the facts including understanding what motivates you and keeps you working towards your goal.

Get started and stick with it!

• +1 Absolutely. Whatever it takes to feel like you are eliminating debt and getting a rush from it. – MrChrister Oct 1 '10 at 18:28
• just like i commented to Tim. You shouldn't mix feelings and money if your goal is to eliminate the debt as soon as possible. – Vitalik Oct 13 '10 at 20:18
• Yes! It's all about staying motivated! – JCarterRN Oct 14 '10 at 21:14
• Isn't doing what "feels like you are eliminating debt" rather than "actually eliminating debt" how people got into unmanageable debt in the first place? – DJClayworth Nov 29 '10 at 18:28
• @DJClay: Spending more than you earn is how you get into debt. The question is regarding the order of paying down debts and the financial and motivational costs & benefits of that choice. – yhw42 Nov 29 '10 at 20:38

Paying off the highest rate card first is certainly not a myth, it's the fastest way to pay off one's debt. So, I agree with Matthew's answer above. Marcin - I would invite you to give a clear example where paying a lower rate debt results in a faster payoff.

The "debt snowball" (The concept of paying the lowest balance first to pay off in full and then move to the next) may very well be emotionally satisfying. But at a price. I wrote an article about the Dave Ramsey Debt Snowball, and linked to a spreadsheet that lets you compare the two methods. Keep in mind, for those who have a lot of debt on credit cards, their low rate cards typically have low limits, so having 5 cards with 8% rates but each with \$1000 credit isn't unusual. Why pay those off when you have a \$5000 balance on a 24% card? This difference adds up to thousands over a few years.

• I agree, i think it's the only way!!! – Vitalik Oct 13 '10 at 20:24
• I agree that it is mathematically better. But your numbers are contrived. The Ramsey folks would insist that if you had all that debt just to dell of the cars and be rid of it. The numbers you are talking about are large so the difference in interest is proportionately large. If it takes YEARS to pay off the first debt then many people are not going to be motivated - thus the value of the "emotional" debt snowball... if people acted rationally all the time then they would NOT be in so much debt int he first place. – Tim Oct 14 '10 at 4:42
• @Tim - Fair enough. Here's the irony - The numbers came from a proponent of the Debt Snowball as did the reference to the Vertex Spreadsheet series. The original poster glossed over the fact that the sheet showed the result of "high interest first" and it was pretty dramatic. All I ever suggest is that one be aware of the difference in cost. If it's minimal, fine. Would you rather not have all the facts and then be free to decide? – JoeTaxpayer Oct 14 '10 at 13:40
• I agree with you about the numbers. It makes more sense to me to hit the high interest first. Absolutely. I am not advocating the other method. It just seems to me that there is some validity (whether we like it or not) that people have success with getting out of debt with the snowball method. Getting to a goal even with some additional cost is better than not reaching the goal. But I am in your camp on this. – Tim Oct 14 '10 at 18:49
• The debt snowball doesn't help you if you have an emergency. The smart thing is to increase your cash flow, even if you end up paying more in interest. If I have 5 debts, two with \$40 minimums, three with \$25 minimums which also have the high rates, and enough cash to eliminate the \$40 accounts quickly, doing that gives me an additional \$80/month. Which can go towards the high rate debt or used for emergencies. The cost of not having cash flow in an emergence situation can drastically outweigh interest savings. You have to evaluate these decisions with more input that simply total cost now. – iheanyi Feb 24 '17 at 6:19

There are a couple strategies for this - one that Matthew proposes - which is mathematically the best - pay off the highest interest balances first and minimums on others.

The other is that you start with the lowest balance one and pay that off, then go through the list to the next, etc. The reasoning goes that it is a little emotional reward - that you can see progress in actual loans/accounts being paid off.

Dave Ramsey has a name for it. Debt snowball or something - like a small snowball rolling and gathering size.

Either way, keep it up.

EDIT: note - the difference in the two strategies is not likely to be much money. The real issues is to pay off as much as you can as quickly as you can.

• Paying off a lot of debt, the difference in order between interest rate and balance made at most 1 month (out of years) difference in my case. – Alex B Oct 1 '10 at 16:10
• I strongly disagree with paying off the lowest amount first. If you need emotional reward, pay off the card that has the cutest logo. The only way to deal with debt is cold-hearted, calculated approach. Yes, at the end it maybe only 1 month difference but maybe 5 for others which depending on the balance and interest rate can be thousands of dollars. – Vitalik Oct 13 '10 at 20:10
• Tim, Please go to my answer above and view the linked article. It offers an example where the high interest first method trumps the low balance method by over \$4000. I don't know what debt profiles of other people are more likely, only that one can calculate the difference and remove any doubt. With all due respect to Marcin, I am sure he's missing something, as he offered no example. I'd rather borrow money at 2% for 20 years than at 24% for one year even though the 2% money may very well have more interest over the full term. This is a point that's easily misunderstood. – JoeTaxpayer Oct 14 '10 at 0:21
• @Vitalik - not everyone lives in a black and white world like you do. Those with more rational thought process don't need your help - they can come to the same conclusions you have by themselves. Those helping people who are battling with a lot of little loans have seen positive results from the small victories of a loan being gone and done. We're dealing with human behavior here - not concepts and theories. Those sometimes don;t last too long in the real world. So, while I agree with you in principle I am not so quick to scoff at other usable methods. – Tim Oct 14 '10 at 18:53
• The other benefit of paying off the lie balance first is you gain the minimum payment in cash flow. Depending on how much room is available in your budget and how many different debt accounts you need to service, improving cash flow may be much more beneficial (think emergency) than the savings in interest. – iheanyi Feb 24 '17 at 6:22

Any of the ways to pay down your credit cards mentioned already will get you debt-free.

I'd like to offer a side method: Increase your income. You'll have more money per month to throw at those debts.

• -1 Cute idea but does not address the question asked. – fennec Oct 5 '10 at 0:07
• It certainly does address the question. It's part of "paying the most I can." ;) – mbhunter Oct 5 '10 at 5:24
• i guess in this case robbing a bank counts too. He didn't ask how to do it legally – Vitalik Oct 13 '10 at 20:15

You do not say where you are located so my answer is specific to the UK. It may have relevance to other countries if similar products are available.

In the UK the credit card companies often have special offers to attract new customers. These are usually something like 0% interest on balance transfers for 12 or 16 months after account opening, usually for a 3% fee. To reduce the total amount payable you should open one of these accounts and transfer the balances from your highest rate cards to this new card. Then pay off the remainder while keeping to the minimum payment on the new card.

Martin Lewis is a financial journalist in the UK with lots of good advice on this.

I've actually wrote a spreadsheet that allows the simulation of various payoff scenarios. Here's some general findings:

1. Myth of 'pay off the loan with highest interest' is most often wrong.
2. Myth of 'pay off the smallest one first so you can use the money toward paying off the other loans' is also usually wrong.
3. Calculate which loan at the end would generate the most interest. That's the one to pay off first. The same amount of overpaying on the biggest interest-generator has the greatest effect at the end.
4. The allocation of payoffs toward some scenarios does not always result in a clear-cut solution. Sometimes the optimal solution is 'in the middle' and you do not benefit from dumping all the extra funds into one loan, but you need to spread it around unevenly. This is what humans are horrible at spotting, but a Solver in Excel will do wonders for you in seconds.
• can you elaborate how "1" can be wrong? (assuming fixed interest on all debts) – Vitalik Oct 13 '10 at 20:12
• The highest interest doesn't necessarily mean highest total interest production. A large school loan, let's say, at a small interest, still can outgenerate a smaller but high interest credit card payment. Looking at the components of the equation that generates the interest makes no sense, take a look at the final result, and you will be severely surprised. CUMIPMT is an Excel function that is very helpful in generating few scenarios to compare. If you'd like, I could send you my spreadsheet so you could see it for yourself. It's been absolutely eye-opening, I couldn't believe it. – Marcin Oct 13 '10 at 21:30
• Sure, put it on google doc and publish a link. The interest on loans accrues daily. i am not sure how it matters if loans is a 1 year loan or 30 years loan. If next month loan A will charge more interest that's the one you should make largest payment to. – Vitalik Oct 14 '10 at 3:07
• The point you are missing is this: Once you pay off highest interest loan, you can use the cash you had been putting towards it toward other things like investing or paying off other balances. That cash stream doesn't dry up once the loan is paid off, it grows, which I'm guessing is what your spreadsheet misses. – yhw42 Oct 15 '10 at 18:51