If you are trying to eliminate debt, and you have multiple accounts – perhaps a couple of credit cards, a car loan, and a student loan –the prevailing wisdom is to get rid of the account with the highest interest rate or largest balance first.
This makes sense because the larger the loan or the higher the rate the more you will spend over the life of the loan in interest payments. But paying on large debts can feel like a real slog – taking years to reduce the balance and finally eliminate them.
Some financial experts, Like Dave Ramsey author of the Total Money Makeover¸ advocate a different approach: eliminating low balance debt first. Here is how it works: each month you make the minimum payment on all your accounts except for the one with the smallest balance. For that account you will pay the minimum and more – in fact, the most you can afford to pay.
Throw money at that account aggressively until it is gone. Getting a debt completely off your back can provide a big psychological lift, proving to yourself that you can close those accounts and inspiring you to go after the others.
Ramsey refers to this method as “behavior modification over math.” The math certainly favors paying off the larger balance, but taking out the smaller ones helps you develop the discipline needed to get out of debt.
Once the smallest debt is gone, go after the next piece of low hanging fruit and continue to do this until you eliminate all your debt. Eventually, you will have to go hard after the large accounts, but practicing on the little ones will make the student loans and other big debts less daunting to take on, and you will be an experienced and accomplished debt killer!
