Should you pay off high interest or high balance credit cards first? Find out as Money Girl answers this listener question.
Q: I have credit cards with wildly different interest rates, such as 9.74% and 25.99%. I think I should pay off the highest interest card first; however, one of the lower interest cards is maxed out. I understand that having a balance above 30% of the available credit limit on a card can hurt my credit score. So what’s more important to focus on first, high interest rate or high balance cards?
A: This is a great question about two important goals: 1) getting rid of high interest debt so you can save money on interest and 2) reducing debt so you can build or maintain good credit.
Keeping your outstanding credit card balances below 20% to 30% of your available credit limit is key for maintaining good credit, no matter the interest rate charged. In Credit Utilization: What It Means for Your Credit Score, I answer common questions about this important ratio, but here’s an example:
Let’s say you have a credit card with a $1,000 credit limit. To maintain a healthy credit utilization or ratio, never charge more than 30% or $300 on that card. If you need to charge more, you’ll be better off with multiple cards that each carry 20% to 30% of the credit limits, than having one card that’s maxed out.
However, even though building credit is important, cutting your interest expense is even more important. So, given the choice I recommend focusing on your higher interest credit cards first—even if they have balances below the 20% to 30% guideline.
Getting rid of high interest debt should always be your priority because it saves you the most money as you pay it off. That savings helps you pay off the next highest interest card even faster and so on.
To learn much more about credit utilization and smart strategies to build credit fast, download the Credit Score Survival Kit. It’s a free video tutorial I created to help you repair and maintain excellent credit for life.
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