Here’s the Best Way to Pay Down Credit Card Debt

It's rough to struggle for your paycheck, only to see most of it disappear into paying off a credit card. Companies have tended toward making minimum payments lower, in the hopes that you'd find it more manageable month-to-month. But new research indicates that we'd rather focus on eliminating long-term debt than prolonging it for short-term relief.

Researchers with Princeton University and the federal Social Security Administration studied randomly selected participants in debt management programs. Conventional wisdom holds that one of Americans' biggest problems is financial liquidity — about one-quarter of us can't come up with $2,000 in case of an emergency. Therefore, the thinking goes, reducing credit card payments leaves these cardholders with more cash to deal with their lives.

But some programs focused on balance forgiveness, paying down bigger chunks of credit card debt. The study found that those who decreased their debt over the long term were significantly more likely to finish the repayment program, less likely to file for bankruptcy, and a little more likely to find employment. Participants in minimum payment plans showed no positive effects; they were nearly 7 percent more likely to file for bankruptcy and more than 3.5 percent more likely to go into collections.

To say that American credit card debt is a big problem can only undersell its severity. It's not hopeless, however. Balance forgiveness strategies reduce the amount of interest you pay on outstanding debt, since you erase it more quickly. It also leaves you on more stable footing if that emergency does hit. Ask to learn more about balance forgiveness tracks in your debt management plan — while you may face larger bills for a short while, it's a process that will more than pay for itself.