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Paying off card debt? Forget math, go snowball, studies say

Kelly Dilworth
Juice Images / Creative RF / Getty Images

Feeling financially bloated after months of heavy holiday spending? If you want to slim down your credit card balances fast, experts typically recommend that you pay down the balance with the highest APR first (after you pay the minimum amount due on all your other cards) and then move on to your next most expensive card. Doing so will save you money on interest and clear your debt more quickly.

But according to a spate of recent studies on the psychology of debt, a slower, more costly method of debt repayment (popularly known as the “debt snowball” method) could be easier to stick to over time – especially if you have trouble staying motivated long enough to seriously dent your balances.

Popularized by the radio host Dave Ramsey, the snowball method of debt repayment encourages borrowers to focus on the smallest, easiest-to-conquer balance first and then use that small win as motivation to progressively knock out their other balances.

“Mathematically, it makes sense to pay on the debt with the highest interest rate first,” wrote Ramsey in a blog post. “But it’s more important to pay your debts in a way that keeps you motivated to keep going until you’ve wiped them all out.

“If you begin with the biggest one, you might think you’re not making fast enough progress, lose steam and not finish the job. It’s better to get quick wins that pump you up.”

The snowball method has come under fire from personal finance experts who say that it encourages consumers to act against their financial interests.

By focusing on the smallest debt instead of the priciest one, consumers could wind up paying substantially more over time – especially if they pay only the minimum amount due on a large and costly balance. Zeroing in on the smallest debt instead of the heaviest could “enable consumers to win the battle but lose the war against debt,” argued researchers in a 2011 paper about consumers’ preference for the snowball method.

Despite math and experts’ skepticism, a growing body of research backs up Ramsey’s claim that the snowball method can be a powerful motivator for conquering debt.

A fall 2016 study published in the Journal of Consumer Research, for example, found that paying off smaller debts first is an effective motivator because it gives consumers a sense of accomplishment when they pay down a large percentage of a credit card balance.

Paying down bigger debts, by contrast, is less effective, the study found, because people get discouraged when a large bill takes too long to noticeably shrink.

“Consumers infer progress based on how much of a dent they are making on any debt account, based on the starting balance and the amount they allocate toward each account,” wrote researchers.

“Substantively, the amount of debt in the account when the payment is applied matters.”

If a consumer’s payments don’t seem to be doing much damage to a balance, consumers are more likely to slow down payments or give up trying to clear their debt completely.

Similarly, a 2015 study published in the Journal of Marketing Research found that paying off small debts first is highly motivating for consumers with multiple debts because it gives them a feel-good moment to hold onto when it’s time to pay down another debt.

“In the area of financial decision-making, self-control issues are significant and can plague even the most financially literate,” wrote study authors Alexander L. Brown and Joanna L. Lahey in an early version of their 2015 study on debt repayment.

“The standard economic approach, neither equipped nor designed to handle these self-control issues, advocates paying off debts in order from highest to lowest interest rates because mechanically this method results in the least amount of money paid to interest.”

The problem with this method, though, is that people tend to be highly irrational and favor what feels good over what works best. People also tend to be easily overwhelmed by large amounts of debt and perform better when tasks are broken up in smaller pieces.

A 2012 study published in the Journal of Marketing Research came to a similar conclusion. It found that borrowers who tackle their smaller debts first rather than their larger balances are more likely to shed their debt completely.

Your bottom line
If you can, pay off your most expensive debt first or consolidate all your balances onto one low rate card with a lengthy 0 percent balance transfer offer. That way, you’ll have at least 12 to 18 months or more to shave down your debt before your interest costs balloon.

If you’re having a hard time staying on track, try the snowball method of debt repayment and systematically pay down your smallest, most manageable balances. The small wins you rack up with each card payment could give you just the kick you need to stay motivated and clear your debt for good.

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