Paying off your credit card with the highest APR first, and then moving on to the one with the next highest APR, allows you to reduce the amount of interest you will pay throughout the life of your credit cards.
Keep paying at least the minimum amount owed on all of them, but focus any extra money you can spare on the debt with the highest interest rate. After you've paid off that balance, tackle the one with the next highest interest rate, then the next, until you've taken care of all of the debts on your plate.
The snowball method suggests that when you're paying off multiple credit cards, it's best to pay off the card with the smallest balance first before moving on to the next smallest and so on. The idea is to pay as much as you can towards the smallest debt while sticking to the minimum payment for the remaining cards.
Option 1: Pay off the highest-interest debt first
Best for: Minimizing the amount of interest you pay. There's a good reason to pay off your highest interest debt first — it's the debt that's charging you the most interest.
Rather than focusing on interest rates, you pay off your smallest debt first while making minimum payments on your other debt. Once you pay off the smallest debt, use that cash to make larger payments on the next smallest debt. Continue until all your debt is paid off.
Consider Paying Credit Cards With the Highest Interest First
You'll typically save the most money if you get rid of high interest debt as quickly as possible. The longer interest accrues on a balance, the more you'll pay.
The closer you are to your credit limit, the more paying off credit cards improves your score because it reduces your credit utilization rate. Similarly, the more you pay down on your balance, the more you impact your credit score.
When you have multiple credit cards, it's more effective to focus on paying off one credit card at a time rather than spreading your payments over all your credit cards. You'll make more progress when you pay a lump sum to one credit card each month.
Despite what you may have heard through the grapevine, it's always better to pay off your entire balance — or credit debt — immediately. Not only will this save you time and money, but it'll reflect well on your credit score.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
In order to pay off $9,000 in credit card debt within 36 months, you need to pay $326 per month, assuming an APR of 18%. While you would incur $2,735 in interest charges during that time, you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
The snowball method tackles your lowest balances first, offering small, more immediate wins. The avalanche method prioritizes higher-interest debts, reducing your long-term costs most. Read more stories from Personal Finance Insider.
It's Best to Pay Your Credit Card Balance in Full Each Month
Leaving a balance will not help your credit scores—it will just cost you money in the form of interest. Carrying a high balance on your credit cards has a negative impact on scores because it increases your credit utilization ratio.
If you're already close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt.
To build good credit and stay out of debt, you should always aim to pay off your credit card bill in full every month. If you want to be really on top of your game, it might seem logical to pay off your balance more often, so your card is never in the red. But hold off.
FICO credit scores, the industry standard for sizing up credit risk, range from 300 to a perfect 850—with 670 to 739 labeled “good,” 740-799 “very good” and 800 to 850 “exceptional.” A 700 score places you right in the middle of the good range, but still slightly below the average credit score of 711.
Credit utilization — the portion of your credit limits that you are currently using — is a significant factor in credit scores. It is one reason your credit score could drop a little after you pay off debt, particularly if you close the account.
According to the Consumer Financial Protection Bureau (CFPB), experts recommend keeping your credit utilization below 30% of your total available credit. If a high utilization rate is hurting your scores, you may see your scores increase once a lower balance or higher credit limit is reported.
It's best to avoid using savings to pay off debt. Depleting savings puts you at risk for going back into debt if you need to use credit cards or loans to cover bills during a period of unexpected unemployment or a medical emergency.
Carrying a balance does not help your credit score, so it's always best to pay your balance in full each month. The impact of not doing paying in full each month depends on how large of a balance you're carrying compared to your credit limit.