If you have several debts, deciding which one to pay first can make your debt payoff plan much easier to manage. In many cases, it makes sense to prioritize high-interest debt while continuing to make at least the required payments on every account. However, the interest rate is not the only factor to consider.
Your income, account balances, fees, past-due accounts, financial goals, and ability to stay motivated can all influence the best order for paying off debt.
Start by Making a List of All Your Debts
Before deciding which debt to tackle first, create a complete list of what you owe.
For each account, record:
- Total balance
- Interest rate
- Minimum monthly payment
- Due date
- Whether the account is current or past due
- Any applicable fees
- Whether the debt is secured or unsecured
Seeing everything in one place makes it easier to compare your debts and create a realistic payoff strategy.
Should You Pay the Highest-Interest Debt First?
For many people, the debt avalanche method is a good starting point.
With this approach, you continue making the minimum payment on every debt while putting extra money toward the account with the highest interest rate.
Once that debt is paid off, you move the extra payment to the next-highest-interest account.
For example:
| Debt | Balance | Interest Rate | Priority |
|---|---|---|---|
| Credit Card A | $4,000 | 27% | First |
| Credit Card B | $2,500 | 21% | Second |
| Personal Loan | $6,000 | 12% | Third |
| Student Loan | $8,000 | 6% | Fourth |
The benefit is that you generally reduce the amount of interest accumulating over time compared with focusing on lower-interest debts first.
What Is the Debt Snowball Method?
Another popular approach is the debt snowball method.
Instead of prioritizing interest rates, you pay off your smallest balance first while making minimum payments on your other debts.
Once the smallest debt is eliminated, you apply that payment toward the next-smallest balance.
For example:
- Credit card: $600
- Medical bill: $1,200
- Personal loan: $5,000
- Auto loan: $12,000
You would focus extra money on the $600 balance first.
The snowball method can provide quick wins, which may help you stay motivated.
Which Method Is Better?
Neither strategy is automatically right for everyone.
The avalanche method can be attractive if minimizing interest is your primary goal. The snowball method may be easier to stick with if seeing individual balances disappear gives you motivation.
The most effective strategy is often the one you can consistently follow.
You can also combine approaches. For example, you might prioritize a seriously overdue account first and then switch to the avalanche method.
Consider Past-Due Debt
A debt that is already past due may deserve immediate attention.
Late payments can result in additional fees, collection activity, credit reporting consequences, or other problems depending on the account.
If an account is seriously delinquent, contact the creditor and ask about available options. You may be able to establish a payment arrangement or discuss another way to bring the account current.
Do not ignore a debt simply because it has a lower interest rate.
Do Not Ignore Secured Debts
Some debts are connected to property that can potentially be repossessed or foreclosed upon if payments are not made.
Examples can include:
- Mortgages
- Auto loans
- Certain secured personal loans
Keeping essential secured debts current can be especially important if falling behind could put your home, vehicle, or other important property at risk.
Keep Paying Every Account’s Minimum
Regardless of which payoff method you choose, do not stop making required minimum payments on your other debts unless you have received professional advice that a different approach is appropriate.
Missing payments can lead to additional fees and other consequences.
Your extra debt-payoff money should generally go toward your priority debt while the remaining accounts stay current.
Build a Small Emergency Cushion
Putting every available dollar toward debt may seem like the fastest approach, but having no emergency savings can create another problem.
An unexpected car repair, medical expense, home repair, or temporary income reduction could force you to use credit again.
Even a modest emergency cushion can provide some protection while you work toward becoming debt-free.
The appropriate amount depends on your circumstances.
Consider the Emotional Side of Debt
Numbers are important, but debt can also be stressful.
If one small account has been causing you significant anxiety, paying it off may provide meaningful relief even if another debt has a higher interest rate.
That does not necessarily make the decision mathematically optimal, but a strategy you can maintain may be more valuable than a theoretically perfect plan you abandon.
What If You Cannot Afford All Your Minimum Payments?
If your income is not enough to cover your required payments and essential living expenses, the problem is different from simply choosing which debt to pay first.
Contact your creditors as soon as possible to ask about hardship programs, modified payment arrangements, or other available options.
You may also want to speak with a qualified nonprofit credit counselor or financial professional about your situation.
If you are considering debt settlement, understand how it works and what consequences it may have before enrolling in a program or making an agreement.
A Simple Way to Choose Your Priority Debt
Ask yourself these questions:
- Which debt has the highest interest rate?
- Is any account seriously past due?
- Could missing a payment put important property at risk?
- Are any accounts accumulating significant fees?
- Would paying off a small balance help me stay motivated?
- Can I maintain minimum payments on all other accounts?
- Do I have enough emergency savings to handle unexpected expenses?
Your answers can help you determine where your extra money should go.
Bottom Line
For many people, paying off the highest-interest debt first is an efficient way to reduce interest costs. Others may prefer the debt snowball method because eliminating smaller balances can provide motivation.
The most important step is to understand your entire financial situation before choosing an approach. Keep essential accounts current, consider past-due and secured debts, maintain some emergency savings when possible, and choose a strategy you can realistically follow.
