The Credit Card Inequality
- how to pay off debt for less

You already know that credit card debt is very, very bad.

But did you know that the way you pay off debt, especially when you have multiple cards, can make a significant difference ? I'm talking hundreds or even thousands of dollars in overpaid interest.

Let's look at an example using 2 credit cards. Suppose for this scenario, you decide to make only the minimum payment on each. This constitutes the worst case scenario.

minimum payment only
$95 monthly total
Card Owed Interest Minimum
#1 $3,500 24.00% $80
#2 $1,000 3.99% $15
paid off in 95 months
$4,599 in interest

Now, using the same 2 credit cards, let's see what happens if you increase the payment of card #2 by $10 per month. This constitutes the common scenario, of paying off the lowest balance first.

extra $10 to card #2
$105 monthly total
Card Owed Interest Minimum
#1 $3,500 24.00% $80
#2 $1,000 3.99% $25
paid off in 79 months
$3,919 in interest

But what happens if you add the extra $10 to card #1 instead ? This constitutes the optimized scenario, of paying off the highest rate first.

extra $10 to card #1
$105 monthly total
Card Owed Interest Minimum
#1 $3,500 24.00% $90
#2 $1,000 3.99% $15
paid off in 74 months
$3,296 in interest

Even though you still pay the same total of $105, there is a whopping $623 difference in interest ! There's also a 5 month difference in when both cards are paid off.

Many people prefer to pay off the lowest balance first, to have one less payment. But the examples illustrate the rule you should always follow with multiple credit cards.

RULE...
After meeting the minimum on each card, any extra money should always go to the card with the highest interest rate.

STRONG RECOMMENDATION...
Whenever a card is paid off, all of its allocated money should be added to the card with the highest interest rate. This is known as the avalanche strategy, and gets you debt free the quickest.

Of course, the best defense against high interest credit cards is not to use them, except in emergencies.