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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
It takes time and effort to pay off your debt, but it’s one of the best things you can do for your money and your mental health.
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 the minimum on all of your debts, and then apply any extra cash to 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
You can keep getting rid of debts as long as you feel like you’re making progress when you pay off a small debt quickly.
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
To get out of debt faster, use the debt snowball method. This will help you pay off your first few small debts faster. This extra cash can be used to pay off the next debt, and so on. This keeps 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.
- Pros: It makes you more motivated and more likely to stick to your plan.
- It might take longer to get out of debt, and you might pay more in interest than with other options.
- If you have trouble staying motivated to pay off your debt, this is better for you.
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.
- The main benefits are that you’ll have more chances to get lower APRs and higher spending limits to cover your future borrowing needs.
- One big problem is that focusing on your credit score might mean making changes to your lifestyle, which can make it easier to lose motivation.
- Better if you want to buy something big, like a house or a car, in the future.
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. Both late payments and accounts in collections can hurt your credit score a lot, so you should focus on paying off your late payments first. This advice is especially important if you have a secured loan like a mortgage or auto loan that you are behind on payments on.
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.