How to Prioritize Debt and Get the Most Bang for Your Buck

So now that the tree and lights have been taken down and your credit cards have cooled off, there’s one more reminder of holiday season 2013 coming soon.

Over the next few weeks the credit card bills will start showing up and act as a reminder of our spending activities last year.

And when it comes time to start making payments, there are a couple of things to consider which will give you the best bang for your payment buck.

Pay Off The Most Expensive Debt First

Ok, so this is a no-brainer.

You look at the interest rates of all of the cards you used to make purchases this past holiday season and sort them from highest to lowest and attack the highest rate debt with aggression.

Credit card debt is almost always going to be the most expensive debt you’ll ever service.

General use credit cards (Visa, MasterCard, Amex, Discover) have average interest rates in the 15-16 percent range. Retail store credit cards are going to run you well above 20 percent.

Pay Off The Lowest Balance First

This is a credit score play. Credit scoring systems will penalize you for carrying multiple credit cards with balances.

So, if you’re able to knock out a few of the lower dollar balances first, regardless of the interest rate, then you’ll be doing your credit scores a favor.

You might be thinking, “Why should I care, I’m not applying for credit anytime soon.” That’s a fair question with a really good answer.

The answer is that the interest rates on your credit cards are at risk of being increased if your credit scores drop too low.

So while you’re not actively shopping for new credit, you’d probably like keeping the rates on your existing credit cards as low as possible.

Credit card issuers use trigger services from the credit bureaus to let them know if your credit scores have fallen below a preset range.

If they do then the issuers can take action to mitigate their risk, which can include lowering your credit limits, increasing your interest rates or closing your account.

Pay Off The Most Leveraged Credit Card First

This is another credit score play. Credit scoring systems don’t like seeing cards that are heavily leveraged.

That means if you have cards with balances that are too close to the credit limit, then it’s harming your credit scores.

And, if you have lower scores you run the same risk described above of having the terms of your credit card accounts adversely modified.

For example, if you have a card with a $1,000 limit and a $900 balance that card is 90% “utilized” because the balance represents 90% of the limit.

That’s bad news for your credit scores. The same balance on a credit card with a $10,000 credit limit represents an almost meaningless 9% of the limit.

Of course none of my advice above is meant to suggest forgoing your payment to ANY of your credit card issuers. Make at least the minimum payment due, well in advance of the due dates.

NOTE: If you took advantage of any “in-store” financing offers that came with a “no payment for X months or years” structure, be sure to read the fine print.

Some of those deals will hit you with interest retroactive to the date of the loan inception if the balance isn’t paid in full by the end of the “no-payment” period.

John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.