Finding the Best Method for Reducing Credit Card Debt

Weighing debt reduction strategies to find the most effective strategy for you.

Not every credit card debt problem requires you to immediately jump into debt consolidation in order to regain control. By streamlining your budget to free up as much cash flow as possible for debt elimination, you can strategically make larger payments on one debt at a time until you have all your debts eliminated.

The information below is designed to help you understand how to compare two proven methods for debt reduction so you can see what will work best in your unique financial situation.

Evaluating which debt reduction strategy is the best

When you want to reduce debt in your budget, you have two basic options:

  1. Start with your smallest balances first to build momentum
  2. Start with your highest interest rate debts first to eliminate to save money

So let’s compare the two strategies side by side with some real numbers to see how long each takes, depending on your situation. With both strategies you start the same way – streamline you budget to cut any unnecessary expenses so you have as much money as possible to put towards debt payments each month.

Reducing credit card debt by highest APR first

For our first example, let’s say that you can make cuts and free up $800 in total to make larger payments to reduce your debt. You have $9,000 of debt spread out between five credit cards:

  1. A low-interest credit card at 15% APR with a balance of $3,100
  2. A travel rewards credit card at 18% APR with a balance of $1,600
  3. A store credit card at 20% APR with a balance of $900
  4. A cash-back credit card at 22% APR with a balance of $1,200
  5. A store credit card at 24% APR with a balance of $2,200

If you start eliminating your highest interest rate debts first, here’s how the repayment breaks down. First you pay the minimum payments on all of the lower interest credit cards and you put the rest of the money left over towards the highest interest rate debt so you are making biggest payment possible.

Note: Minimum payment calculations are determined by a formula, then rounded up to the nearest dollar. They usually decrease dollar by dollar over time as you pay down your debt. However, for the purposes of this exercise to simplify the math, we simply used the starting minimum payment for each card and set that as a fixed amount. We used a payment calculation of 2.5% of the starting balance, which is fairly standard for the industry.

Reducing credit card debt by APR, Slide 1

After 3 months you almost have your first balance paid off, so you can pay off that balance in Month 4 with $410 and then the rest of your debt elimination fund can be moved to the next card down the line – the credit card with 22% APR.

Reducing credit card debt by APR, Slide 2

Once you have that first card paid off, you’re left with only four credit cards to pay. Keep in mind that you don’t want to charge on that card or any of the other cards; otherwise, you’re adding to your debt and effectively increasing the time and cost of eliminating your debt. Balance your budget so you can afford everything you need without credit cards to make debt reduction most effective.

Reducing credit card debt by APR, slide 3

So you pay off your second credit card in Month 6, and the balance on the next card down is already small enough that you can pay it off in the next month.

Reducing credit card debt by APR, Slide 4

Now you’re down to just two credit cards. The next credit card down the line with 18% APR can get paid off in two billing cycles.

Reducing credit card debt by APR, Slide 5

You’re now down to just one credit card – the credit card with the lowest APR. You have your full $800 payment to eliminate the debt in big chunks, so you’re done in 4 months.

Reducing credit card debt by APR Slide 6

In 13 months – just over one year, this debt reduction strategy has cut your debt down to zero. Over the course of repayment for all five credit cards, you pay $906.94 in interest charges. So in total, you’ve paid $9,906.64 to eliminate your debt.

Once you get to month 13 where you’re only paying $301 to eliminate that last bit of debt, you can start to put any discretionary expenses that you cut at the beginning of the process back into your budget. So by tightening your belt for 13 months, you’re able to get ahead of your debt and regain control of your budget.

What’s the difference it you start with lowest balance first?

If you start eliminating debt with your lowest balances first, you can gain momentum to tackle your biggest debts. So let’s see what happens if we keep the same $800 payment, but go through the debt reduction process from lowest to highest balance.

This method is meant to clear of “low hanging fruit” debt quickly so you have funds faster for your bigger debts. And as a result, you pay off your first credit card within the first two billing cycles of your strategy.

Reducing credit card debt by balance, Slide 1

In another two billing cycles you can have the second debt paid off and start putting larger payments to your third lowest balance.

Reducing credit card debt by balance, Slide 2

Now you’re down to your three credit cards with the highest balances. Two more billing cycles will take you down to just two credit cards:

Reducing credit card debt by balance, Slide 3

In another three months you can eliminate the fourth balance…

Reducing credit card debt by balance, Slide 4

So in month 9 you’re still down to just one credit card to pay off and it’s the same 15% APR credit card, but because you used a different debt reduction strategy the balance ending in month 9 is slightly higher than it was with the other strategy. So what happens?

Reducing credit card debt by balance, Slide 5

You’ve eliminated your debt in the same amount of time it still takes 13 months to pay off all 5 credit cards. However, the interest charges you paid during that time are slightly higher here. The interest charges you paid in total over the 13 months equal $956.12. So your total cost to eliminate your debt would be $9,956.12.

So with both strategies, you eliminate your debt in 13 months, but the first plan costs you $906.94 in interest charges while the second costs $956.12. You save almost $50 by reducing based on highest interest rate first so that’s your better option in this circumstance.

Does it always work that way?

Unfortunately, it’s not always as easy as simply just picking the high APR debt reduction plan first. For example, if you have only $500 to eliminate debt every month, then starting with those big balances could be a big pain. In this case, knocking out those small debts makes a difference because you gain momentum and can stay motivated because you get that feeling of success after you pay off each card. This can often keep you on track, whereas if you start with high APR you can lose motivation and fall off your strategy – like getting tired of a diet and going back to overeating.

So what you really need to do is weigh your personal situation. The following factors will go into to determining which strategy is really the right one for you to use.

  1. How much debt, in total, do you have to pay off?
  2. How much cash do you have available for debt elimination?
  3. How are your balances broken up versus the interest rate on each card?

You’ll basically want to tailor a strategy that you know you can stick to first, then determine if one solution or another will get you out of debt faster and what’s the difference in total interest charges is to see if it’s worth it to start with high APR first.

How do I make my own debt reduction plan?

To do the calculations exactly as we did above, it requires a spreadsheet and a credit card debt calculator that shows you the ending monthly balance on each account. Bankrate has a really good minimum payment calculator that can help you compare fixed payments versus minimum payments. You just need to know how your payments are calculated, which you can find on your original credit card agreement or your credit card statements.

Be prepared that you’ll have to do a little legwork to make the math work out for what you’re paying on each credit card each month. But with a little work, you can compare the two strategies.

Just keep in mind that there are other methods of reducing debt like debt consolidation which could allow you to pay lower interest charges and get out of debt faster than just doing the grunt-work on your own through careful budgeting. You’ll want to compare these basic debt reduction strategies to the various strategies for debt reduction, too.

Confused and looking for help?

If this kind of detailed accounting makes your head spin, there is another solution – ask an expert. Call Consolidated Credit today at or complete an online application to request a free debt and budget analysis from a certified credit counselor. They can do the math for you and help you weigh debt reduction versus other options such as consolidating through a debt management program.

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