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Deciding which debt to pay off first can be confusing. With student loans credit cards, auto loans and more, it’s easy to feel overwhelmed. But creating a plan and paying down your debts systematically can make a huge difference.
This comprehensive guide will explain the most effective strategies for prioritizing your debts and becoming debt-free as fast as possible
Why Paying Off Debt Matters
Getting out of debt has major benefits:
- More money in your pocket each month as you shed debt payments
- Lower stress when you’re not buried under high-interest debts
- Higher credit score as you lower your credit utilization
- Increased savings when you redirect debt payments to savings
- Freedom to use your income for other goals
Paying down debt takes focus and commitment, but it’s one of the best things you can do for your finances and peace of mind.
Debt Payoff Methods: An Overview
There are a few main methods for approaching debt payoff:
Debt Avalanche Method: Pay minimums on all debts, and put any extra money toward the debt with the highest interest rate first. When that’s paid off, move to the debt with the next highest rate.
Debt Snowball Method: Pay minimums on all debts, and put any extra money toward the debt with the smallest balance first. When that’s paid off, move to the next smallest debt.
By Payment Size: Focus on the debt with the largest monthly payment first, regardless of interest rate or total balance.
By Debt Type: Pay debts off by type (student loans first, then credit cards, etc).
The Best Method: The Debt Snowball
Of all the debt payoff methods, the debt snowball is the most effective for a few key reasons:
1. Quick Wins Keep You Motivated
When you pay off a small debt quickly, it gives you a sense of momentum and progress to keep knocking out debts.
Seeing a debt get paid off completely is extremely motivating. The debt avalanche can take many months or even years before your first “win”, making it harder to stay focused.
2. Frees Up More Money Fast
With the debt snowball, you’ll free up the monthly payments from the first small debts more quickly. This new money can be rolled into tackling the next debt to keep the snowball effect going.
Paying only minimums on large debts with the debt avalanche means less money to put toward debts at first.
3. Interest Differences Are Minimal
Some argue paying high-interest debt first always makes mathematical sense. But when you run the numbers, the interest differences are usually fairly small, especially on consumer debts.
The motivation and momentum the debt snowball provides often make the tiny interest differences worthwhile.
4. Easy to Implement
Ordering your debts from smallest to largest is simple. The debt avalanche requires calculating interest rates and ordering appropriately.
Following a simple plan makes it more likely you’ll stick to it!
How to Do the Debt Snowball
If you have multiple debts, here are the steps to follow for the debt snowball:
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List debts smallest to largest. Ignore interest rates and focus on total balance.
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Pay minimums on all debts except the smallest.
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Attack the smallest debt with a vengeance. Throw every spare dollar at it until it’s gone.
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Roll the amount you were paying on the first debt into the next smallest debt. Repeat steps 2-3 until all debts are paid off!
Let’s look at an example:
- Debt 1: $300 credit card balance
- Debt 2: $1,500 personal loan
- Debt 3: $5,000 student loan
You would pay minimums on the personal loan and student loan, and put everything else toward the $300 credit card balance. Once that’s paid off, roll that $300/month into paying off the $1,500 personal loan. Finally, the $300 + $150 = $450 monthly payments get thrown at the student loan until you’re debt free!
Tips to Crush Your Debt Snowball
To supercharge your debt snowball, here are some powerful tips:
- Automate payments so you don’t miss any deadlines or minimums
- Track your progress and celebrate milestones to stay motivated
- Pick up a side hustle for extra snowball fuel
- Look for things to sell like unused electronics, furniture, etc
- Avoid new debts that would sabotage your plan
- Call creditors to lower interest rates to speed up payoff times
Stick with the plan and those debts will melt away faster than you thought possible!
Exceptions: Pay These Debts First
With most consumer debts, the debt snowball sequence is ideal. But there are a few debts that should always get priority:
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Taxes: Pay off IRS tax debt before other debts, since they have lots of power to make your life difficult!
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Child support: Getting behind on child support payments can have serious legal consequences.
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Student loans: If in hardship-based default, get current on payments before tackling other debts.
Other than those special cases, plow ahead with the debt snowball!
Avoid Debt Consolidation Loans
When researching ways to pay off debt faster, you may come across debt consolidation loans. This is when a lender combines all your debts into one new loan, often with a lower monthly payment.
However, this type of loan typically comes with fees, a longer repayment term, and risks:
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Fees: You’ll pay fees to the consolidation company, often negating any lower interest rates.
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Longer term: By stretching out the repayment timeline, you’ll pay more interest over time.
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Lose motivation: Having just one payment can lead to complacency instead of attacking your debts.
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Missed payments have big consequences: You don’t want one loan default rather than defaulting on smaller debts if you run into hardship.
Instead of risky debt consolidation, stick to the tried and true debt snowball!
Let the Debt-Payoff Journey Begin
Deciding which debt to pay off first is just the start of the debt freedom journey. But now that you know the most effective method, you can create a clear payoff roadmap.
As you celebrate those quick wins, the debt snowball effect will build unstoppable momentum. Before you know it, you’ll be debt-free and ready to spend, save and invest on your own terms.
No more juggling overwhelming monthly payments. No more high-interest balances looming over you. Just an open road of financial possibilities!
What debt will you demolish first with an intense debt snowball? The sense of relief from paying off that first balance will give you all the inspiration you need to keep up the hard work.
You’ve got this! Time to make a plan and watch your debts disappear.
Example Using the same figures as the “high-interest first” strategy, start by focusing on credit card one since it has the lowest balance. After it’s paid off, move on to credit card two, then the personal loan.
- Key advantages: Builds motivation and encourages you to stick with the plan.
- Key drawbacks: It may take longer to become debt-free, and you could pay more in interest than with other methods.
- Better if you… struggle to stay motivated about paying off debt.
Example Assume you have the following credit card and loan balances:
- Credit card one: $750 ($1,000 credit limit, 75% credit utilization)
- Credit card two: $1,500 ($3,000 credit limit, 50% credit utilization)
- Credit card three: $250 ($2,500 credit limit, 10% credit utilization)
- Auto loan: $25,000
- Student loan: $15,500
Since your credit utilization significantly impacts your credit score, pay down credit cards with high utilization rates — both overall and per card. Start by focusing on those with utilization rates over 30 percent. Reducing the utilization of these two will give you the best chance at improving your credit score alongside paying your other bills on time.
- Key advantages: You’ll have more opportunities to qualify for lower APRs and receive increases in spending limits to meet future financing needs.
- Key drawbacks: Focusing on your credit score may also require lifestyle changes, making it easier to lose motivation.
- Better if you’re… looking to eventually finance a large purchase, such as a house or a car.
Which Debt Should I Pay Off First?
FAQ
In what order should I pay off my debt?
… debt, put the money you were paying on your highest interest debt—the minimum plus the little extra—towards the debt with the next highest interest rate
What debt is most important to pay off first?
Delinquent accounts
If you have any debt that’s overdue, start there. Delinquent accounts can have a substantial impact on your credit, just like accounts in collections, so those should be your first priority. This advice is especially critical if you have a delinquent secured loan, like a mortgage or an auto loan.
Which debt gets paid first?
Debts with higher interest rates
By paying off your debts with the highest interest first, you’ll pay less interest. This will help you be debt-free sooner. To use this strategy, list your debts in order, from the highest interest rate to the lowest. Put money towards the debt with the highest interest rate.
Which debt to settle first?
With the debt avalanche method, you prioritize paying the most money to the account (usually credit cards) with the highest interest rate first, which can help you save money. Once you pay off your highest-rate account, you’ll focus on the account with the next-highest rate, and so on, until all your balances are paid.