Should i pay off small credit cards first

There are two main types of credit accounts: revolving credit and installment credit. Your credit card falls into the revolving credit category, and things like your mortgage, car and student loans fall into the other.

Having a mixture of the two is important for your credit score, but making sure you pay off both kinds of debt is even more crucial for a healthy financial future.

While we recommend keeping up with payments on both, there is general guidance to follow when you're deciding which to prioritize paying off first.

Below, Select breaks down which debt is better to pay off first and what to look out for if you're having trouble keeping up with your balance.

What debt you should pay off first

Having both installment loans and revolving credit will help your credit score, as long as you pay the bills on time. Both types of credit illustrate to lenders that you are able to borrow varying amounts of money each month and consistently pay it back.

But if you're struggling to decide which to pay off first, focus on your credit card debt.

Experts generally agree that the most basic rule of thumb when developing a long-term debt pay-off plan is to ask yourself a simple question: Which debt is costing you more? If you carry a balance on your credit card from month to month, that ballooning balance is likely costing you much more than your installment debt.

This approach of paying off the balance with the highest APR first and then working your way through all your debt from highest to lowest APR, is known as the "avalanche" method. With this method, you end up paying less overall in interest.

As an example, let's take a look at the current interest rates on credit cards (revolving credit) compared to student loans (installment credit).

The average credit card APR is 16.61%, according to the Federal Reserve's most recent data. That's more than six times higher the 2.75% federal student loan interest rate for undergraduates for the 2020-21 school year. Even the federal rates for unsubsidized graduate student loans (4.30%) and parent loans (5.30%) don't come close to credit card interest rates.

Tackling your credit card debt first will also give you a better shot at improving your credit score. Revolving credit is highly influential in calculating your credit utilization rate, which is the second biggest factor (after payment history) that makes up your credit score.

Experts generally recommend using less than 30% of your credit limit. As you pay off your revolving balance, your credit score will go back up since you are freeing up more of your available credit.

What to do if you're having trouble keeping up with your revolving balance

Bottom line

When prioritizing paying off your debt, start with the balance that has the higher interest rate (likely your credit cards) and go from there. No matter what type of debt you'll be dealing with, though, the most important factor is that you pay your bills on time.

Information about the Capital One SavorOne Cash Rewards Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication. 

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

When you're paying off any amount of debt, the first step is to make a plan that works with your budget.

Ask yourself what is most important: chipping away at debt over time by setting aside a small amount each month, or paying off your debt as fast as possible?

This choice depends on a few factors, including how much disposable income you have leftover after covering your basic expenses and how active you want to be in paying down your debt quickly.

Once you know how much you need to set aside for debt payoff every month, you can calculate how long it will take you to knock out any lingering balances. And if you have debt on more than one credit card, planning ahead also helps you focus on which balance to pay off first.

Below, CNBC Select outlines three common strategies for paying off debt. We encourage you to learn about these and other debt repayment options so that you can decide on an approach that's right for you.

1. Paying only the minimum

The least aggressive debt payoff method is making only the minimum payments. Experts advise you only pay the minimums when your main goals are to keep your account from falling into delinquency and to protect your credit score from being dinged if you consistently miss payments.

Nonetheless, paying the minimum is still better than paying nothing at all, and it's easy to automate your credit card payments so that you can expect the same amount to be withdrawn from your bank account each month. When you use autopay, you can guarantee your payment is made on time, which is a huge factor in having a good credit score.

The biggest downside to paying only the minimum is that you will continue to accrue additional interest as long as you are carrying a balance month to month. The longer you carry a balance, the more interest you accrue and the bigger your debt load becomes.

When you only pay the minimum each month, not all of your payment always goes toward your principal; depending on how your issuer calculates your minimum payment, a portion of it could go toward interest. This makes it harder to completely pay off your debt. 

For example, CNBC Select looked into how much it would cost the average American if they only made minimum payments on a credit card balance of $6,194 with an interest rate of 16.61%. It would take approximately 17 years and three months to completely pay off the debt and  the cardholder would pay a whopping $7,286 in interest alone.

Since paying only the minimum on your credit card debt could end up costing you thousands and take you years to repay, you shouldn't follow this strategy once you can afford to pay more.

2. Paying more than the minimum

Paying more than the monthly minimum helps accelerate your debt payoff and is a more active approach. 

When you pay more than the minimum each month, you are chipping away a larger chunk of your debt and thus shortening the amount of time it will take to pay off.

Unlike just focusing on one credit card balance, paying more than the minimum is harder to do if you are juggling multiple credit cards with revolving balances. For this scenario, we recommend the popular 'snowball' or 'avalanche' debt repayment methods. We outline each below:

• Snowball method: With this method, you prioritize paying off your credit card debts with the lowest balances first. The first balance may be small, but you feel accomplished and motivated to tackle the next one. Similar to a snowball rolling down a hill and getting bigger and bigger, you start small but your balances grow larger until all your debt is paid off.
• Avalanche method: This repayment method focuses more on your credit card interest than your balances. You prioritize paying off the credit card with the highest interest first because it is essentially costing you more the longer you carry a balance on the card. Even if the balance is larger and it takes you more time to pay off than a smaller balance on a different credit card, you start chipping away at it first because it racks up the highest interest each month that it continues going unpaid. This method is often the faster way to conquer your debt, which is one reason why it's termed 'avalanche.'

When deciding what method works best, there is no right or wrong answer. Choose the method that motivates you the most: seeing results quickly by paying off low credit card balances or saving money by paying down high-interest debt.

3. Using a balance transfer credit card

Opening a new credit card when you already have credit card debt seems counterintuitive. But a balance transfer credit card can actually help you as long as you use it correctly.

For those who qualify, using a balance transfer card is the most active approach to paying off your credit card debt because it involves moving your debt to a card with a zero-interest period. Balance transfer cards offer an introductory 0% APR period that typically range from six months to up to two years. Your credit score determines the amount of debt you can transfer (either a percentage of your total credit limit or a set dollar amount).

To use balance transfer cards correctly, you need to make sure you pay off your debt within that zero-interest time frame; otherwise, you'll face interest charges. You will most likely need to have good or excellent credit to qualify for the longer interest-free periods, but there are options available for fair credit as well. There are some balance transfer cards with no fee, but most usually require a 2% to 5% balance transfer fee (or a $5 minimum).

Below are some of CNBC Select's picks for the top balance transfer credit cards.

• Winner: U.S. Bank Visa® Platinum Card
• Best for Rewards: Citi® Double Cash Card
• Long 0% APR for Balance Transfers and Purchases: Citi Simplicity® Card
• Best for Fair Credit: Aspire Platinum Mastercard®

Note that because of the recent economic fallout from the coronavirus, credit card issuers and lenders are tightening requirements so it is harder to get a zero-interest balance transfer offer.

Bottom line

To decide which of these three most common credit card payoff strategies works best for you, consider your current finances and what you can afford.

If you have low cash flow at the moment, only make the minimum payments on your balance each month until you're in a better financial situation. For those who can pay more than the minimum, try the snowball or avalanche methods to create a more long-term plan. And if you have good or excellent credit and would benefit from a year or so of no interest for paying off your debt, apply for a balance transfer credit card.

Information about the Aspire Platinum Mastercard® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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