Your Brain Is Keeping You in Debt (And How to Fix It)

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Your debt never seems to shrink. Each month you resolve to ditch your credit cards, spend less, and devote more money to paying down your outstanding debts. When next month rolls around? You're staring at even more debt.

What's the problem? Blame your brain.

Recent research from Scientific American suggests that our brains are wired so that when we do decide to pay off our debt, we tend to focus on our smallest ones first. But it'd make much more sense to pay off highest-interest debt first.

Your Brain on Debt

Scientific American, which published the results of its debt study in February of this year, started its research by concluding that the most effective way to battle debt is to pay off those debts that come with the highest interest rates first. Usually, that'd be the debt piling up on one of your credit cards.

The reason that this makes the most sense is that higher-interest-rate debt grows more quickly. If you pay that debt down first, your overall debt load will not rise as fast.

But instead of attacking higher-interest-rate debt first, consumers usually focus on paying down what they consider the most manageable of their debts, generally the smallest ones they face. They do this even if the interest rates attached to these smaller debts are lower.

How did Scientific American determine this? They performed an experiment in which participants were asked to pay multiple debts, all of which came with varying interest rates. Researchers gave these participants a paycheck at the beginning of each round of this game, asking them to use it to pay off their imaginary debts in whatever way they deemed best.

According to the study, only 3% of the participants — just five out of 162 — focused on paying down the debt with higher interest rates. Scientific American reported that the majority of participants paid off their smaller debts, instead.

This isn't just bad money management. It's psychological. Your brain does you no favors when you're battling multiple debts.

The Scientific American story says that people are naturally averse to debt accounts. This means that consumers with many different debts naturally want to reduce the total number of these accounts. This pull is so strong, it overwhelms the more rational approach of first paying down those debts that cost the most.

Teach Your Brain to Battle Debt

Can you fight your brain? Can you resist the natural temptation to close out those smaller debt accounts first? Sure, if you focus.

Consider the avalanche approach to debt repayment: Consumers pay off those debts with the highest interest rates first, making only the minimum monthly payments on the rest. Once they pay off the debt with the highest interest rate, they then move on to the debt with the second-highest rate. (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)

The benefit here is obvious: Debt with higher interest rates cost consumers more. Eliminating it first saves lots of money in the long run.

And if you want to outwit your brain's natural tendency to steer you in the wrong direction? You'll go with the avalanche method, too.

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