Many Michigan consumers believe that when it comes to reducing credit card debt, one should aggressively pay off the smaller accounts first. In fact, recent research from the Kellogg School of Management suggests that this approach will can do more than simply help consumers become debt free. The researchers also believe that such behavior is an accurate predictor of a consumer's chances of remaining free of debt over the long term.
However, there may be other approaches that could help consumers climb out of debt more quickly. For example, paying down the balance on a high-interest credit card would likely be a better decision than simply paying off and closing a smaller balance with a lower interest rate. When it comes to debt reduction, there is no such thing as a 'quick fix,' and consumers should be wary of blanket statements that are not inclusive of the fact that individual circumstances vary.
Another risk of paying off small debts first is that there is a potential for consumers to gain a false sense of success. This can translate into a lack of diligence to continue on a path to becoming debt-free. Consumers can focus on the total number of closed accounts rather than the outstanding balances that remain, as well as the interest rates that accompany larger accounts.
The best approach toward debt reduction is simply gaining as much information as possible before making a decision. It is also important to keep in mind that in some cases, no debt reduction plan is sufficient to bring a consumer back into a state of financial stability. In such cases, bankruptcy may offer the best possible solution. Filing for personal bankruptcy can eliminate the majority of consumer debt for residents of Michigan, and can give individuals the chance to start anew and build a stronger foundation if financial security.
Source: Business Insider, "Why It's Not Always Best To Pay Off Small Debts First," Jill Krasny, Aug. 21, 2012