Many consumers will resolve to pay off their credit card for the new year, and their intentions are in the right place. But according to a recent study, how they go about will most likely be wrong.
Mathematically, the best of eliminating consumer debt on a card with the highest interest rate first. But the researchers found that many of us tend to pay off the card with the smallest balance first, even if it carries the lowest interest rate. By not addressing the most expensive debts first, we end up paying more in the long run.
“There are emotional benefits to close an account,” said Rick Scott, Assistant marketing Professor and co-author of of the University of Michigan study.
Of course, it feels good to eliminate debt cards. And some financial adviser tells consumers to wash away the smallest debt first. But today, when so many of us are struggling to pay the Bills, we have to be smart about how we use every dollar. And in this case, that means paying off a credit card is the highest rate first.
Of course, pay off the smallest balance is not an error if the first card that has the highest level.