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Economic Perspective: Paying Down Credit Card Debt

NC State College of Agriculture and Life Sciences professor Dr. Mike Walden working in a recording studio.

MARY WALDEN:

“Today’s program looks at paying down credit card debt. Mike, credit card debt is large and growing, and is a major issue for many households. If a person has debt on several credit cards, and wants to pay down on their total debt, what procedures should they use?”

MIKE WALDEN:

“Well for an economist there’s an easy answer here. What you want to do is you want to look at your credit cards, and first of all you’ve got to make your minimum required payments. So we’re assuming you’re going to make your minimum required payment, and maybe you’ve got some extra money, you can pay down more. The question is how you do that.”

“So what you want to do is you want to look at your credit cards, and you want to pick the one that has the highest interest rates, and you want to pay down on that as much as you can. Once you get that one paid off, if you’ve got extra money then, you can move to the one that has the second highest interest rate because those that have the higher interest rate are actually costing you more so you want to get rid of those if you can.”

“When we look however at what people in fact do, they don’t do this. They don’t do this at all. In fact, studies that follow people who have lots of credit cards and have some extra cash so they can pay down some, apparently what they do is they pay a little bit off on each of them. In fact, if there’s any rationale here, what they do is they put a little more on the credit card that has a bigger balance, and then move to the one that has the second biggest balance, et cetera.”

“They don’t look at all at the interest rate. So this is where I think some economic education comes into play and is very helpful because it’s really those that have the highest interest rate that’s costing you more so you want to pay those down and get rid of those if you can. This is totally different unfortunately from what people in fact do.”