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Choosing Which Credit Card to Pay Off First

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No, this isn’t going to be yet another regurgitated advice piece telling you to pay off the cards with the highest interest rates first because you’ll save money.  Anyone who suggests that’s the best and only way to prioritize cards for accelerated payback is simply scratching the surface of the options and is only looking at the problem from one dimension, interest rates.  The next time you’re going to resolve to pay off some plastic you should consider these options and pick the pay-off strategy that works best for you;

Paying Down The Card That is The Most “Maxed”

This is a credit score play, which is also an indirect financial play.  Remember, every single one of your credit card issuers has the ability to check your credit reports as often as they like through a process called “Account Management.”  That means your spending activities on other cards are no secret and can lead to adverse creditor actions, even with the CARD Act protections in place.

Having a card that is highly leveraged often leads to lower credit scores because of your elevated utilization percentage.  I wrote about utilization and how it’s calculated here.  Ignoring highly utilized cards can often lead to other credit card issuers increasing the interest rates on their cards, lowering their credit limits or closing the account altogether.  They’re doing this because they can clearly see that you’re bouncing near your credit limits, which is very indicative of elevated credit risk.

The Card With the Lowest Balance

I’m not suggesting this strategy because you’ll feel some sense of accomplishment when the statements stop coming, which may or may not actually be true.  I’m suggesting it because it’s also a credit score play, which comes with the same benefits as I described above.

There’s a measurement in the FICO credit scoring system that counts the number of accounts with a balance greater than $0.  In fact, for consumers who have decent scores this is one of the more common reasons why their scores aren’t even better.  Eliminating a balance, or several of them, softens the blow of this measurement.

The Card With the Lowest Interest Rate

This is a little counterintuitive but still a solid strategy, especially if you do business with trigger-happy credit card issuers who haven’t gotten their arms around their credit card default rates.  The last thing you want to do is give your credit card issuer an incentive to increase your interest rate from 12.99% to 24.99% just because your balance is too high.

The CARD Act prevents retroactive rate increases so it does them no financial good on the current balance to increase your rates.  But, if you’ve proven that you are willing to run up a huge balance on a low rate card then perhaps you’d be willing to do so on a card with a higher rate, where they will benefit financially.  As long as your card is at least 12 months old the issuer can increase your rate for any reason as long as they give you a 45-day advance notice.

The Card With the Highest Limit

There are a variety of reasons why it’s good to have high limits on your credit cards.  Perhaps the most significant benefit is the access to unsecured capital, which in most cases costs your nothing more than maybe an annual fee.  And, as previously mentioned, your credit scores benefit from having cards with high limits.  You’d like to maintain these benefits by NOT giving your issuer incentive to lower your limits.

There is a phenomenon in the credit card industry called “chasing the balance”, that became more commonly known of after Hurricane Katrina.  Many Gulf Coast residents were using their retail cards to survive and many issuers of those cards were lowering the limits down to the current balance.  When the cardholder made a payment the issuer would lower the limit in lock step, thus chasing the balance.

If your issuer feels like your risk has elevated, but not so much to close the card, they may either lower your limit by a predetermined percentage OR chase your balance right down to when you pay it off.  Keeping your balance moderate even on high limit cards can prevent this.

You’ve probably noticed that most of these strategies are either contradictory or, at least, not always in the best interest of the issuer.  Credit card issuer risk managers are tasked with controlling the downside risk of their cardholder portfolio and they don’t have all the answers.  That’s why your “risk” measurement is fluid from one issuer to another, and even from one billing cycle to another.  Clear as mud, eh?

John Ulzheimer is the President of Consumer Education at, the credit blogger for, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and, 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 or Intuit. Follow John on Twitter.


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