Harvard Research Finds Best Way to Reduce Credit Card Debt
I have seen firsthand how consumer debt can derail client retirement success. Credit card debt can delay younger clients from establishing a savings regiment. It is not uncommon to see senior clients using their assets to reduce their children’s debt. There is also a physiological impact on clients and their children as well. Uncontrollable debt cripples inspiration and tends to cast a level of failure over those being smothered by it.
New research from the Harvard Business Review shows that there are effective and ineffective ways to pay off debt. With the average household credit card debt hovering around $16,061, let’s look at what this latest research says.
Paying off the highest interest charges has always been a plan that made the most sense. But what makes sense mathematically on paper doesn’t always work best in real life. Paying down debt is as much about motivation as it is about money.
Harvard researchers looking at 6,000 clients determined that consumers who focused on repaying one of several accounts, as opposed to chipping away at multiple accounts at once, paid off more of their debt over 36 months than their counterparts who took the opposite route. The participants who were assigned to pay off the accounts one at a time worked harder than those assigned to pay back their debts equally, finishing 15% more quickly.
As the study states, “Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress — and therefore their motivation to continue paying down their debts.”
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