Conventional wisdom says if you have different account balances, you should pay the ones with the highest interest rates first. It makes the most financial sense. However, a new study finds people are more successful eliminating debt if they pay the small balances first, regardless of interest rates.
Marketing professors from Northwestern University's Kellogg School of Management used a debt settlement database to analyze how 6,000 people finally paid off their credit card debt. They found that the "small victories" approach of closing accounts increased the likelihood of getting out of debt:
"We found that closing debt accounts - Independent of the dollar balances of the closed accounts-predicted successful debt elimination at any point in the debt settlement program," Gal says.
Those who started with paying off small balances were even more successful than those who paid off a larger portion of debt first.
The math might not make sense, but as Dave Ramsey, who champions this "debt snowball method" says, getting out of debt isn't about math?it's about changing behavior.
The "snowball approach" to debt | Kellogg School of Management via Dave Ramsey
Photo by OtnaYdur / Shutterstock
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