How to pay off credit card debt

For people with multiple credit cards, the best way to pay off credit card debt is simple. If you can’t pay the full balance for all the cards, pay the minimum monthly payment for each, and then devote the rest to repaying the card with the highest interest rate. Following this rule, you incur the least interest and save the most money.

Very few people do this. According to a recently released study (paywall) from the National Bureau of Economics Research, only about 10% of people in the UK with multiple credit cards repay their debt in the most efficient way. In fact, the researchers find that individuals hardly pay attention to interest rates at all. For people with two credit cards, only 51.5% of payments above the minimum go to the highest-interest card.

These people are throwing away their money. The average person with two cards, who does not pay off all their debt each month, loses over £60 annually ($83), and those with five cards lose around £250. People with large balances lose much more.

So if people are not making payments correctly, what are they doing instead? The researchers tested out six possible methods people might be using to make payments (economists call such rules “heuristics“). These are listed below.

As you read them, try to guess which one you think is correct. The answer is below the image of Auguste Rodin’s sculpture The Thinker. For each rule, this is what people do after making the minimum payment on their cards.

1️⃣ The 1/N rule: Split payments equally across cards. With two cards, and $100 to make payments, $50 goes towards paying down the balance on both.

2️⃣ Balance matchingMake payments based on the relative size of outstanding balances. With $300 to make payments on two cards, one with a balance of $2,000 and another with a balance of $1,000, this means something like $200 goes towards the $2,000 balance card, and $100 to the $1,000 balance card.

3️⃣ Repay the card nearest its credit limit: This prioritizes payments on cards at risk of going over their credit limit and incurring an extra fee.

4️⃣ Repay the card furthest from its credit limitThis gives the user the ability to make a big payment, if needed, the next month.

5️⃣ Repay the card with the highest balance: The balance is the most conspicuous number that borrowers see on their statement, so the largest sums may attract the bulk of repayments.

6️⃣ Repay the card with the lowest balance, with the intention of getting that card to zero (the “snowball method”): Some financial advisors suggest this strategy, arguing that it simplifies a person’s debt portfolio and makes them feel good, thus generating a “snowball” of good behavior.

Reuters/Philippe Wojazer

And the winner is…

The researchers find that credit card repayment behavior is best described by the 2️⃣ “Balance matching” rule. Although they can’t say exactly how many people use this method, they note that this rule predicts more than half of the seeming randomness they see in the data—far more than the others.

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This method makes little sense. If the credit card with the largest balance also has the lowest interest rate, it is wasteful to dedicate scarce resources to paying it down while interest racks up faster on other cards.

Damningly, researchers note that this payment behavior makes people act like pigeons. In a landmark 1961 study, psychologist Richard Hernstein found that when pigeons were offered pecking keys that generated food at different speeds, the pigeons did not peck the keys in the most efficient manner. Rather, they pecked them in proportion to the speed they regenerated. Some evolutionary psychologists think we developed a tendency towards balancing because it is useful for animals when hunting.

Unfortunately, many people apply similar logic to the repayment of credit card debt. This allows credit card companies to feather their nests at our expense.

Why Credit Card Debt Hurts Credit Scores

Many consumers find it surprising that even “on-time” credit card accounts can damage credit scores. The truth is it takes a lot more than good payment history to earn a great credit score. Payment history is just one piece of the much larger puzzle. Outstanding credit card debt can have a negative credit score impact even if you make all your monthly payments by the due date.

Credit scoring models like FICO and VantageScore are designed to compare how much credit card debt you owe (balances) with how much you are eligible to spend (limits). This relationship between your credit card balances and limits is referred to as your debt-to-limit ratio or your revolving utilization ratio.

You can calculate your revolving utilization ratio on a credit card account by dividing the balance by the credit limit and multiplying that number by 100. For example, if you have a credit card account with a $5,000 limit and a balance of $2,500, then your revolving utilization ratio is 50% (2,500 ÷ 5,000 = 0.5 X 100 = 50%). Pay that balance down to $1,000, and your new revolving utilization ratio would be 20% (1,000 ÷ 5,000 = 0.2 X 100 = 20%). The higher that percentage, the lower your credit scores… it’s that simple.

  • Related: Why Credit Utilization Is Such a Big Deal

Payment Due!

One myth that consistently circulates is that you need to be carrying a balance on your credit card each month to improve your credit. While you do want to continually be using your credit cards and paying them off each month to show responsible money management, it’s more important to concentrate on your credit utilization ratio.

Credit utilization makes up 30% of your FICO credit score. Utilization is the ratio of the balance you’re carrying on your card versus the total credit limit. The ideal ratio is to keep your balance under 30% of the total credit limit. For example, if your credit card’s limit is $5,000 – you want to keep less than a $1,500 balance at any given time. Keeping your utilization ratio under 30% shows creditors that you are able to use your credit cards wisely, instead of maxing them out each month.

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If you’re able to at least decrease your credit card balances under 30% of the total limit, you will see significant improvements in your credit score.

Benefits to paying off a card in full

Paying Off Debt

If you can afford to pay of your debt quickly, do it! Not only will it improve your credit utilization score, but it will save you hundreds if not thousands in interest. When you carry a balance month after month, your credit card lender will be charging you interest for the amount kept on the card. If you can afford to pay it off immediately, you will say goodbye to that carried interest.

Once your balance is reset to zero, you shouldn’t just stop using your credit card. Once it’s paid in full, start using it for only necessary purchases like gas or groceries, and then continuing to pay that balance off each month. This will keep the payment history portion of your FICO score in good standing.

When to NOT pay in full


There are a few situations in which paying off your card in full is not recommended, and monthly payments would be healthier for your finances. These include:

  • If you’d have to delve into your emergency or retirement savings to pay off the bill. Don’t steal money from yourself!
  • You have to put a large, but necessary purchase on your credit card. If you have to deal with an expensive car repair that would wipe out your checking account, it’s okay to keep it on your card. Just make sure you have a clear payment plan set up to pay it off as quickly as possible – and you’re using your card with the lowest interest rate.

Useful tips

Useful Tips

Regardless of whether you’re able to pay off your entire credit card debt at once, or you’re starting to slowly chip away at the balance month by month, the most important part is that you’re actively working to improve your financial situation. Your payment plan has to be what works best for your overall financial picture.

If you’re not able to pay off your card in full, here are some helpful tips to improve your credit even if you still have balances remaining.

  • If you have multiple credit cards, focus on paying off the card with the highest interest-rate first.
  • Take advantage of special offers like 0% interest rates by transferring your balance to that new card and paying it off before the introductory rate expires.
  • Once your utilization ratio dips below 10%, FICO doesn’t score higher for a lower percentage. So focus on getting as close to 10% as possible if you can’t get all the way to zero.
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To keep track of your current credit situation, visit to get a free copy of your credit report from each of the major credit bureaus. Another great resource to learn about your credit score is Utilize both of these free financial resources to monitor your credit as you work to pay off your credit card debt.

Keep learning how to improve your credit by subscribing to our Cents to Save blog! Get financial advice and resources straight from the experts and take charge of your financial situation. Sign up now!

4. We set goals, stuck to them, and were able to accelerate the timeline once we saw how easy it all was.

Pretty quickly, we found that we were able to increase the amount that we put toward paying off our credit cards. And what we’d find is that some months — like months we were given monetary gifts, or bonuses at work — we were able to pay off larger chunks of the debt at once.

Image Source: Wendy Wisner

When all was said and done, the whole thing only took about nine months, which was half the time that I had allocated for us. Going in, I didn’t realize how crucial it would be to pay attention to even the most minute details of our budget — I was often able to put aside just a little extra here and there by making more prudent and informed spending choices. If I hadn’t seen it laid out for me every month, I don’t think I would have gotten there.

Most of all, it was about making a choice to focus squarely and unapologetically on our debt — to come to terms with the fact that it was at a place where action was needed before things spiraled out of control; to learn to be more savvy with our budget overall; and to keep our eyes on the goals no matter what.

Now that I’m on the other side of it, I can honestly say that getting of debt is truly freeing. It’s a weight that is lifted off you — one you didn’t even realize had been so crippling. I know not every family is in a position to pay off their debt, but if you think there’s any chance you can do it, even if you just chip away at it little by little, I urge you to give it a go in whatever way you can. Your financial and emotional health will be better off in the end — trust me, I’m living proof.

Article Posted 7 months Ago

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