Paying off smallest balances first

[Crossdivided]

I've noticed on several occasions that advice was given to pay off smallest balances first and work up to large. Besides having less checks to write per month, what is the advantage? Lets assume apr etc being equal.

I'm beginning to pay off 90%+ util, and want to devise the best course of action. Thank you!

NFCU 15k, 10k, 1.5k
GE 700, 600
FPB 300
Comenity 250

[Gunnar419]

Paying off the smallest balances first is mainly motivational. Instead of feeling as if you're going to be paying debts forever, you get a quicker, "Hey, I can do this!" reward.

But it's also usually done as part of "snowballing." That is, you take the monthly payment you were paying on that small(er) balance and apply it to the next smallest balance, and so on until you're done. When you start with the smallest balances you can do that more quickly.

Some people still say it's best to pay off high interest balances first, and in purely monetary terms it may be. But paying off the smallest first is more satisfying and helps keep you going.

[supervelous]

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@Crossdivided wrote:
I've noticed on several occasions that advice was given to pay off smallest balances first and work up to large. Besides having less checks to write per month, what is the advantage? Lets assume apr etc being equal.

I'm beginning to pay off 90%+ util, and want to devise the best course of action. Thank you!

NFCU 15k, 10k, 1.5k
GE 700, 600
FPB 300
Comenity 250

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The reason the advice is sometimes given to pay off smallest balances first, is the psychological motivation you get from eliminating a debt.  There are some (Dave Ramsey) who advise to pay off balances from smallest to largest regardless of APR, in what is known as the "snowball method".  You figure out what you can pay per month towards your debt, you pay the minimums on all others except for the smallest balance, in which you pay the rest of your monthly debt payment allocation.  As you pay off the smallest amounts, you get a psychologic boost, and you move on to next smallest, in which you'll have an even bigger payment to make than you did on the recently eliminated debt since you no longer have that payment.

However, from a pure financial standpoint, the best way to do it is to make minimum payment on all but the highest APR balance, in which you make the largest payment.  This saves the most interest in the long run.  

The smallest balances first method is similar to weight loss, where when people see results right away, they are more likely to continue.  If you pay off a couple credit cards right away, same thing.  That's why some recommend small to large.  

I personally do highest APR, because I had the discipline to stick with it, and I'm down to my last few thousand in debt from tens of thousands years ago.  Staistically, if I had followed the snowball method and made the same payment amounts, I'd have more debt remaining than the route I took.

[guiness56]

It's not just for motivational purposes.  The more balances you have reporting 0 the better for your score.  FICO doesn't like to see all CC accounts with balances.  Just like they don't like to see all of them with none balances.  That is why the one reporting a 9% or below and the rest 0 balances will give you an optimal FICO score.

By paying off the smallest balances first you will have them reporting 0 balances faster than trying to pay down a larger balance.

Also, if you have individual cards that are maxed out, at least pay enough on it to get it below that.  You are dinged on individual cards that are maxed out.

[longtimelurker]

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@guiness56 wrote:

It's not just for motivational purposes.  The more balances you have reporting 0 the better for your score.  FICO doesn't like to see all CC accounts with balances.  Just like they don't like to see all of them with none balances.  That is why the one reporting a 9% or below and the rest 0 balances will give you an optimal FICO score.

By paying off the smallest balances first you will have them reporting 0 balances faster than trying to pay down a larger balance.

Also, if you have individual cards that are maxed out, at least pay enough on it to get it below that.  You are dinged on individual cards that are maxed out.

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Yes, but a lot of the discussion usually isn't focusing on score (people are deeply in debt and need to reduce that without concern about score).   And if you are concerned about score, as you suggest it is more complex, a combination of getting most balances to 0 but also reducing utilization, which may involve paying down a card with neither the smallest balance or the highest APR.

[Crossdivided]

Hey Guiness how ya been?!?

Yeah I had considered that aspect. Fico model considers maxed at 90%+ if memory serves...so if I was considering fico modeling as well, should prob go with:

1. Bring all balances below 90%
2. Pay off small balances
3. Pay large balances down in turn
-or- 3a. Pay each larger balance to 70%, then to 50%, 30%, 10%, etc.

I would suspect 3a would have a slightly marginal fico modeling advantage...that MAY help with CLIs once overall util hits 50%, which would of course lower util by way of cli.

[guiness56]

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@longtimelurker wrote:

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@guiness56 wrote:

It's not just for motivational purposes.  The more balances you have reporting 0 the better for your score.  FICO doesn't like to see all CC accounts with balances.  Just like they don't like to see all of them with none balances.  That is why the one reporting a 9% or below and the rest 0 balances will give you an optimal FICO score.

By paying off the smallest balances first you will have them reporting 0 balances faster than trying to pay down a larger balance.

Also, if you have individual cards that are maxed out, at least pay enough on it to get it below that.  You are dinged on individual cards that are maxed out.

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Yes, but a lot of the discussion usually isn't focusing on score (people are deeply in debt and need to reduce that without concern about score).   And if you are concerned about score, as you suggest it is more complex, a combination of getting most balances to 0 but also reducing utilization, which may involve paying down a card with neither the smallest balance or the highest APR.

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OP didn't mention score one way or the other.  I just gave the facts.

[guiness56]

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@Crossdivided wrote:
Hey Guiness how ya been?!?

Yeah I had considered that aspect. Fico model considers maxed at 90%+ if memory serves...so if I was considering fico modeling as well, should prob go with:

1. Bring all balances below 90%
2. Pay off small balances
3. Pay large balances down in turn
-or- 3a. Pay each larger balance to 70%, then to 50%, 30%, 10%, etc.

I would suspect 3a would have a slightly marginal fico modeling advantage...that MAY help with CLIs once overall util hits 50%, which would of course lower util by way of cli.

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I've been good.  Thanks for asking!

It really depends on what you are looking to gain.  Scores, paying off the debt or both.

No matter how you do it, in the end your score will go up once they are paid down.

If you want your score to go up as you go, then, while paying the minimum on the other cards, bring the ones maxed out below that mark.  Start with the lowest balance, pay that off, then the next etc. 

If you can afford to pay off the larger balances then you can.  At this point, I would go with the ones that have the higher interest rates to get out of having to pay that.

If you can't pay off the larger balances, then yes, reducing the utilization on them will help significantly.

[Startome]

Growing up my parents were big advocates of the Snowball idea, and I saw why. They involved me early on in finances, (middle school and a little before) and they were deeply in debt. The first year they tried this plan (along with more disciplined spending habits) they paid off 20K in debt. It's simply a matter of motivating yourself, being frugal with your spending, and not giving up. The Snowball is a big drive for people who have struggled with debt payoff in the past.

[atarvuzdar]

Let's not forget that working to boost your score could help you nab a lower-APR card that you could transfer your high-APR balances to. That could save you quite a bit of money very quickly... so the snowball method isn't "just" about motivation or a better score (though both are justifiable)--it could actually save you money. Of course, there's certainly something to be said for paying down your high-APR debt sooner than lower-APR debt and sticking strictly to that method. The most important thing is the commitment to paying down debt and reaching that end goal.

Good luck!