You have too much credit card debt, and you want to trim some of the fat. Which credit card should you pay off first? Your high interest card? Your card with the highest annual fee? Your rewards card?

Sure, there are other ways to reduce credit card debt (like balance transfers and debt consolidation), but let’s assume you’ve decided to simply pay off the cards you have. How should you go about it? Let’s assume you have the following three credit cards:

1.    St. George Vertigo MasterCard — This is a low interest credit card with a 10.99% APR on purchases. Let’s say you maintain a balance on this card (currently at $2000), and you pay the minimum payment each month. This card has a $55 annual fee.

2.    American Express Blue Sky Card — This is a rewards credit card that you use to accumulate frequent flyer points which you then use to save money on an annual holiday. The card has no annual fee, a 19.99% interest rate on purchases, and up to 44 interest free days (which you regularly take advantage of).

3.    Citibank BP Credit Card — This is another rewards card, which you specifically use to save money on petrol. The purchase interest rate is 19.89%, and the card comes with a $79 annual fee. Let’s say you usually maintain a balance of around $500 on this card.

Which card should you pay off first?

Figuring out which credit card to pay off first to reduce debt isn’t really a complicated decision. You should pay off the card that costs you the most money!

Given the example credit cards above, it’s easy to see which card would be costing you the most — the St. George Vertigo MasterCard. Not only are you paying a $55 annual fee (among other typical card fees), but you’re paying interest on that $2000 balance. It doesn’t matter if it’s the lowest interest credit card if that’s the card you’re ultimately paying the most interest on (in dollars — not APR). Pay off that $2000 balance first, and close that card if you want to. Then it’s time to tackle the two rewards cards.

Both the American Express and the BP credit card give you benefits when you use them, which might make the decision seem a bit trickier. It’s not. Again, which costs you more money? The only additional thing to consider is which card also saves you the most money through the rewards programme.

The cards have similar interest rates. The BP card has an annual fee — score one point for the Amex. You also maintain a balance on the BP card. Since you take advantage of the interest free days on the Blue Sky card, you don’t have a balance to pay off. So pay off the BP credit card (just keep paying off the American Express each month in the process).

That’s a simplified look at cutting down credit card debt. You could take it further and decide to close one of those last two cards. To figure out which, look at the rewards programmes.

Figure out how much the Blue Sky card usually saves you on your annual holiday. Would you like to save more? Could you save more by putting your petrol purchases and other everyday charges on that card? Or is it more important to you that you save that money directly on petrol purchases, rather than contributing to the larger “bulk” savings later? Figure out what’s important to you.

The key is this — as soon as you’ve brought your balances to $0, do what you can to keep them there. Make sure you pay off any balance incurred within the interest free period provided by the credit card product. You can still take advantage of rewards in the process, and you can do it while remaining debt-free.