Ask Money

A debt roll-up

Chris Farrell Mar 28, 2011

Question: During my tenure as a graduate student I racked up debt on 3 different credit cards, two of which are still maxed out (the other is about 50%) paid down. Now that I am trying to pay them off I am torn between trying to pay one off at a time or if I should pay them off equally so the debt ratio of each card is less. I know you should pay down the highest interest first to save money, but would it help your credit score to have three cards at different percentages – ie 0%, 50%, 100% – or would it better to have them each at 50%? Thanks! James, Baltimore, MD

Answer: I would go the debt roll-up route. It’s an approach that builds momentum with the passage of time. You’ll get rid of the debt relatively quickly and pay the least amount of interest with the debt roll-up. Your credit score will be fine, too.

The basic idea is for you to pay the minimum on all your credit cards except the highest rate one. That’s where you target your extra savings. Eventually that debt is gone. You then attack the next highest rate debt that remains, paying the minimum on the last card, until the all the balances are paid off. I described it in this commentary after the holidays.

One other point: Do you really need three credit cards after you’ve paid off the debt? I can see why the credit card companies want you to have several cards. It means more fees and potential interest charges for them. But what do you really need?

My bias is for people to have only one credit card for personal use. If you have business expenses it’s convenient to put them on another credit card. (That’s what I do.) However, when I’ve written my perspective in the past a number of blog readers have argued for a second personal card for anyone who travels a lot or even to hold in reserve in case of an emergency. That’s fine. I would still look at how many you need. It may be three. It may be fewer than that.

I’m glad you’re getting rid of the debt.

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