Should I Pay Off One Credit Card or Reduce the Balances on All Debt?

You’re ready to pay down your credit card debt, but you carry a balance on multiple cards. Use this background on credit card debt and interest payments to help you decide where to begin.

Understanding Your Debt-to-Credit Ratio

Your debt-to-credit ratio (also known as a debt utilization ratio) equals your debt divided by your total credit, which might be the sum of several lines of credit.

Your debt-to-credit ratio accounts for roughly one third of your credit score.1 It’s best to keep your debt-to-credit ratio low; you should aim to have the sum of your balances equal 30% or less of available credit.

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Pay Off High-Interest Credit Cards First

Pay the minimum payment on all credit cards each month to avoid penalties. After that, work toward paying off the debt on the card with the highest interest rate. While some advocate for paying off your smallest debt first because it seems easier, you’ll save more on interest over time by chipping away at high-interest debt.2

One caveat: If you are close to the maximum credit limit on one card, start by paying down that card so that the interest charges don’t send you over your credit limit, resulting in fees.

What About 0% Interest Credit Card Offers?

Many credit cards have 0% interest introductory offers. Transferring your balance(s) to a zero-interest card can give you the chance to save on interest while paying off your debt. But read the fine print. Some credit cards charge a “balance transfer fee” of 3%. Also, learn how long the offer is good for—once it expires, your interest rate will increase and you could be charged accrued interest if the balance hasn’t been paid in full before the introductory rate expires.

Resources:

1http://www.nerdwallet.com/blog/credit-cards/credit-utilization-ratio-debttoincome-ratio-whats-difference/

2http://www.creditcards.com/credit-card-news/paying-off-debt-study-smallest_balance-financially-wrong-1276.php

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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