Study: To get out of debt, start small

Trying to get out of credit card debt? Then there’s a good chance that you’ve been told that the best strategy is to pay down the highest-rate credit cards first.  That would presumably cut your interest expense and make the job of paying back the debt a bit easier.

But it turns out that this intuitive advice may not always be right. A new study out of Northwestern University’s Kellogg School of Management finds that in real life the most effective way to pay off debt is to start small.

 Studying data on 6,000 clients of a leading debt settlement firm, marketing professors David Gal and Blake McShane found that paying off the smallest debts first vastly increased the chances that a borrower would repay everything they owe. The reason: motivation.

Borrowers facing a mountain of debt simply found it harder to get started. But when debtors broke the job into smaller pieces by focusing on just paying off the smallest balance, they we less likely to be daunted by the enormity of the task.

“Having some small task to tackle early on might motivate you to get started,’ ” Gal said.

Indeed, starting small boosted the chance of paying off all the debt, the researchers found. During the first year of repayment, borrowers who paid off small balances versus highest-cost balances were 14 percent more likely to succeed, according to the study. Those who continued with debt repayment for four years were 43 percent more likely to achieve full repayment by tackling small debts first.

“From a rational perspective, you should always pay the higher balances first,” Gal said. “That’s what people have recommended in the past. But what we’re saying is that [motivation] is another factor to consider.”

Comments

Market Data

Market News

Stock Watchlist