How many different debts do you have? Credit card bills, car loans, student loans…they add up pretty quickly.
Logically, it seems like a better idea to pay down debt with the highest annual percentage rate (APR) first, so you don’t rack up huge interest on an already-huge loan. But a team of researchers at Northwestern University have found the opposite:
“A team of Kellogg School researchers has found that people with large credit-card balances are more likely to pay down their entire debt if they focus first on paying off the cards with the smallest balances — even if that approach doesn’t make the best economic sense.”
Paying off the smallest debt first and moving on the next-smallest is termed the Snowball Method. It harnesses the psychology of motivation to keep debtors on the right track to paying off their debts.
According to the David Gal, one of the researchers, “We found that closing debt accounts—independent of the dollar balances of the closed accounts—predicted successful debt elimination at any point in the debt settlement program.” This means that the more debt you pay off, the more you feel like you’re on a roll, which makes you more likely to keep paying off other debt.
I’ve used this method without even knowing it. Paying off my credit cards is always my first priority, while I keep chugging along with my student loans, paying a few dollars over the required amount every month. The satisfaction I got after closing an account I used to buy a new pair of prescription glasses also helped me think twice about racking up new debt: that zero balance feels so good I don’t want to give it up without a fight.
What are your methods for getting rid of debt?