This is How Experts Say You Should Pay Off Credit Cards

Keeping your credit card balance low can seriously improve your financial situation by way of boosting your credit score. Thirty percent of your credit score is dictated by how much of your available credit you’re already using.

And according to the Federal Reserve Bank of Boston, only 35 percent of credit card users between the ages of 25 and 50 in the U.S. are paying off their balances in full every month. The average adult younger than 35 carries a credit card debt of more than $5,000, a data analysis by ValuePenguin showed. That means a lot of us are wasting money on interest and preventing our financial health from being as solid as it could be. (Though young adults are doing a lot better than the average U.S. household that carries a balance—their month-to-month credit card debt is $16,048.)Pay Off Credit Cards pbs rewire

If you carry a balance with you from month to month, don’t feel defeated—a lot of young people at the beginnings of their careers essentially borrow against a potentially higher salary down the road; however, the Federal Reserve Bank itself recommends you pay it down. But what’s the best way to do it?

Start with the smallest

People are most likely to eliminate credit card debt when they focus on their smallest balance first, an academic study of 6,000 credit card users over 36 months showed. These users had an average of 2.5 open credit cards accounts each. (The average U.S. household that carries a balance month to month uses four credit cards.)

The researchers found that the card users who targeted the bulk of their repayments at one account at a time, rather than paying down all their accounts equally and simultaneously, were more successful at chipping away their debt. When attacking credit card debt, start with paying off your smallest balance and work from there, the findings suggest.

Why we like to work with bite sizes

After learning what worked best for these 6,000 credit card users attempting to pay down their debt, the researchers did a series of tests to learn why.

Pay Off Credit Cards pbs rewireIn one experiment, participants who paid off one account at a time rather than try to pay multiple accounts down equally worked harder and paid off their debts 15 percent more quickly. Another experiment showed that people who paid off accounts one at a time felt they were making more progress toward eliminating their debts and so were more motivated to keep chipping away.

What’s motivational is the portion of the credit card balance you’re are able to pay off, the researchers found, rather than the size of the payment or the remaining balance. So, when you feel like you’re making a sizable dent—which would be magnified if you start with your smallest balance—you’re more jazzed to keep going toward a zero balance.

Because of that, the researchers don’t recommend consolidating your debts, unless that would result in a significantly lower interest rate. Having a debt that appears larger (even though we know it’s really not) is demotivational and will discourage you from paying it off quickly, wrote Remi Trudel, an author of the study and assistant professor of marketing at Boston University’s Questrom School of Business, in Harvard Business Review.

Katie Moritz

Katie Moritz is Rewire’s senior editor and a Pisces who enjoys thrift stores, rock concerts and pho. She covered politics for a newspaper in Juneau, Alaska, before driving down to balmy Minnesota to help produce long-standing public affairs show “Almanac” at Twin Cities PBS. Now she works on this here website. Reach her via email at [email protected] Follow her on Twitter @katecmoritz.