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Psychology and credit card debt -- what's the connection?

San Diego residents who are stuck watching as credit card bills pile up may be wondering about the best approach to paying what they owe. When a debt burden begins to get out of control, threatening a person's credit and ratcheting up the anxiety level, it can seem like there is no way the accumulated debt can be paid off. But some experts believe that the process of paying off credit card debt can be as much mental as it is financial, and a recent article suggested an approach which may seem counterintuitive.

Psychology can have a powerful impact on a person's effectiveness, no matter the situation. But, when the situation calls for cultivating a plan to tackle credit card debt, one expert has suggested that debtors pay off the smallest balance first. This approach, or so it is claimed, will make the debtor feel like they are making progress on what can otherwise seem like a monumental task. This will in turn help the debtor maintain motivation to stick to their repayment plan, even though many other experts say that the best approach is to pay off the balances with the highest interest rates.

So, is there any evidence that tackling the smallest debt first is a sound approach? As it turns out, Northwestern University researchers claim that after looking into this proposed approach, there is some evidence to back it up. The study found that the number of accounts closed can be a better indicator of overall success than the total dollar amount repaid. In short, approaching credit card debt from a human perspective, accounting for psychological benefits, can be a better approach for many people.

But, for those who find that their debt burden is simply more than can feasibly be paid back, another option to consider is bankruptcy. A bankruptcy filing will often end with a discharge of credit card debt, leaving the debtor in a better position to restart a financially sound life.

Source: The New York Times, "To Get Out of Debt, It May Help to Think Small," Ann Carrns, Aug. 20, 2012

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