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Which credit card do you pay first? That's the question from a LiveCheap Reader in Denver. "I  have two credit cards. First card has a $12,000 balance and a 17.99% interest rate and card #2 has a $7,500 balance with an 9.99% rate. I incurred the larger balance in my small business which had slowed down. I've heard some experts say you should pay the smaller balance first, but isn't that more costly? I'm finally in a spot where I can pay an extra $1,000 a month, what do you recommend? I also get these 0% balance transfer offers for a year. Do you think that would help me repay my debt faster? Help!"
Denver, thanks for the question. What you are referring to is a credit card debt snowball. Whether it is right for you really depends on who you are and your personality. In your case, you incurred at least part of your debt for business purposes, so your debt may not be tied to an inability to curb spending. Many debt counselors do recommend paying the smallest balance first, regardless of the interest rate, because it will give you a "win" earlier and helps you keep your debt paydown momentum up. For some people, it does make sense eventhough logically, if you paid the higher interest rate card, you would pay less interest.
In your case, the cost of getting the early victory is roughly $300 over the six months it will take you to pay down your smaller debt first. But if that smaller victory increases your chances for paying off all of your debt, then it may be well worth it. If you decided to go after your larger debt, it would take you about 11 months if you are paying $1,000 above the minimum payment. At that point, you would wipe out your $7,500 credit card in rapid fashion since you would only have the single smaller payment.
For me, when I had mulitple debts, I tackled the highest interest rates first. Of course, I am pretty logical and I shoved it all in a spreadsheet and calculated my total interest costs. I felt better as the total interest dropped each month and that was incentive enough. Are you going to be satisfied knowing that you are dropping your interest payments as fast as possible or are you going to need the positive reinforcement of the smaller debt getting eliminated? If you doubt your resolve to eliminate your debt, go after the quick victory with the smaller card.
As for the balance transfers, in your case, I wouldn't do it. It used to be that 0% balance transfer offers were screaming bargains if you were going to pay off your debt within a year. They had generous terms and capped or no transfer fees. Unfortunately, if you read the fine print today, you'll find out that your transfer typically comes with a 4% balance transfer fee. Once you go past a year, the rate will likely jump to something akin to your current rate.
In your scenario, you were going to pay that $7,500 off in 6 months. That means that you are going to carry a $4,000 average balance and pay about $200 in total interest. With the balance transfer, you will pay $300 upfront to do the transfer. So for this card, you are going to pay 50% more in interest than you would have in the default scenario. Even worse, the 0% interest will make it more likely that you won't want to pay this debt off since it "costs you nothing" and you already paid a high fee to do the transfer. You might save a few bucks by transfering the balance on the higher rate card but there is the strong possibility that you fail to pay that card off before the rate jumps.
Your best bet is to focus all your efforts on paying down your debt and stop incurring any new debt along the way. Good luck with getting rid of your debt.
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