debt

6 klutzy steps to debt mismanagement

Pay small debts first
Pay small debts instead of those with high interest rates © FotoStocker/Shutterstock.com

Pay small debts first

It's an accomplishment when you manage to pay off one of your debt obligations. But sometimes people spend time paying down small debts instead of spending their money to tackle a debt with a higher interest rate.

"People have a hard time understanding just how fast that interest curve grows," says Scott Rick, an assistant marketing professor at the University of Michigan.

He says it's human nature to want to "pursue goals that are closest to the finish line" by paying off a smaller loan and getting that feeling of accomplishment.

But taking that approach instead of taking on debts with higher interest rates can make it more difficult to dig yourself out of debt, Rick says.

"Research suggests once you tackle one of these small things, you celebrate and take your foot off the gas," he says.

Marguerite Mount, CPA, managing director of the Mercadien Group in New Jersey, suggests that consumers look at what debt has the highest interest rate and focus on getting that cleared away first. Once that's paid off, you can use that monthly payment and apply it to the debt with the next highest interest rate.

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