Paying off small debts first isn't just a "natural tendency." Consumer advice sites actually encourage this as a motivational strategy. Every single one of them.
Having read this, now I question the objectivity of those types of advice pieces.
For example, here's a story on US News that covers three strategies for paying off credit card debt. The first tip is to pay off higher interest cards. But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?
This "3 strategies" thing is very widespread, and all of the sites are the same, from bank sites to credit recovery sites to financial reporting in magazines and newspapers. The first that's presented always sounds complicated (calculate bla bla bla). The second strategy is always "pay smallest debt first." Nice and simple. If both are presented as good strategies, which do you choose? The one that requires work, or the one that seems simple?
I used to read these types of advice pieces when I had high debt following a layoff in 2002. I've recovered since then (paid off $65k in debt all at once with a cash out on my house, thus avoiding bankruptcy). And now the No. 1 rule is do not use credit cards to pay for things you can't afford. Use them only as a tool to stay on the grid so that you have a good credit rating so that you get better deals on everything that involves looking up your credit rating. (You'll get a lower price on a car, for example, if you have a better credit rating.) So take out a couple cards; make small purchases; auto-pay on a regular schedule. (Do not change you payment schedule or make extra payments. Some credit reporting agencies lower your score when you do this.)
Not all articles on this are so clear, but at least this US News one is:
The optimal (highest rate first) approach is a slow slog that can be discouraging and result in relapses. The sub-optimal (smallest debt first) approach shows progress much faster, and if paired with the snowball approach (as debts are paid off, freed cash goes to the next debt), it creates the illusion (until high value debts are all that remain) of fast progress. It's psychologically easier to stick with.
> But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?
Again, this article in particular, but the actual recommendation is to pay at least the minimum, which is not the same.
Having read this, now I question the objectivity of those types of advice pieces.
For example, here's a story on US News that covers three strategies for paying off credit card debt. The first tip is to pay off higher interest cards. But the second is to pay off the smallest debts first and pay the minimum on the other cards. What?!?
http://money.usnews.com/money/personal-finance/articles/2014...
This "3 strategies" thing is very widespread, and all of the sites are the same, from bank sites to credit recovery sites to financial reporting in magazines and newspapers. The first that's presented always sounds complicated (calculate bla bla bla). The second strategy is always "pay smallest debt first." Nice and simple. If both are presented as good strategies, which do you choose? The one that requires work, or the one that seems simple?
I used to read these types of advice pieces when I had high debt following a layoff in 2002. I've recovered since then (paid off $65k in debt all at once with a cash out on my house, thus avoiding bankruptcy). And now the No. 1 rule is do not use credit cards to pay for things you can't afford. Use them only as a tool to stay on the grid so that you have a good credit rating so that you get better deals on everything that involves looking up your credit rating. (You'll get a lower price on a car, for example, if you have a better credit rating.) So take out a couple cards; make small purchases; auto-pay on a regular schedule. (Do not change you payment schedule or make extra payments. Some credit reporting agencies lower your score when you do this.)