Which Debts Should You Pay Off First?

Most everyone who has debt wants out of it, but that’s a huge task. One of the most common questions people ask themselves when they decide to tackle their debt is, “Where do I start?” All financial situations are different, making that question difficult to answer in simple terms.

If you have one debt — perhaps a single credit card balance — the game plan is pretty simple. After budgeting for your essentials (rent, utilities, basic grocery needs), see how much extra money you can allocate to the credit card balance. Throw money at it till it’s gone.

With two or more debts, things can be trickier. The easiest way to get started is to go through a checklist of sorts to determine which debts need your attention most. People have to prioritize their debts for two reasons: They either can’t afford all the minimum payments they have and must choose which ones to pay, or they want to pay more than the monthly payment, because they want to be debt-free as soon as possible.

Categorize Your Debt

There are two types of debt: secured and unsecured. Secured debt means there’s an asset tied to the loan, like a home or a vehicle, which the lender can repossess if you don’t pay as agreed. Secured loans often come with lower interest rates than unsecured debt, because the lender has something of value to take if bills go unpaid.

Say you have an auto loan and a large amount of credit card debt, and you can’t afford to pay both. Prioritize the secured debt (auto loan), because if you don’t pay it, you’ll lose your car, which could prevent you from getting to work, jeopardize your job and cost you the income you need to pay any of your bills.

If you can afford your debt payments but just want to get rid of them, the opposite strategy makes most sense. Mary Hunt, founder of Debt-Proof Living, said to target unsecured debt because it generally has higher interest rates, and it’s often the kind of debt that quickly gets out of control.

Look at Interest Rates

If you’re deciding between prioritizing credit cards, student loans and personal loans, an easy way to choose your target is to look at interest rates. If you can budget extra money for debt-payoff, and put it toward high-interest debt (most likely credit cards) so your problem stops growing.

“Continue making the minimum payments on your student debt,” Hunt said, “but target the credit card debt. … Don’t let it come back.”

Again, if you’re prioritizing because you can’t afford all the payments, the strategy will be a bit different. Even though student loan debt is unsecured, defaulting on those loans has much more severe consequences than defaulting on credit card debt, because education debt is rarely dischargeable in bankruptcy, and missing student loan payments can lead to wage garnishment. Before you start picking and choosing bill payments, look into your student loan repayment options and see if you can lower the amount due each month.

Decide What You Want

If you’ve decided you need to target credit cards (your high-interest unsecured debt), you may have to further prioritize. Some people recommend first going after the balances with the highest interest rates, since that will save you the most money in interest charges. Others will tell you to choose the smallest balance. (If those happen to be the same balance, the choice is easy.) Hunt is in the “small balance” camp, because paying off that first card gives you the motivation to keep going, she said. Targeting the big balances first can have the opposite effect: “Emotionally that’s like going on a diet and not losing any weight for the first five years,” Hunt said. “Give yourself an emotional boost when you reach that ‘zero.’ As someone who’s done this myself, that sends you to the moon.”

However, if you can’t stand the thought of letting the balance with a 20% APR continue growing while you tackle a small sum, you might be better off going after that debt first. It’s all about deciding what will make you feel best and give you the confidence to keep going toward a difficult-to-reach goal.

Start Making Progress

Once you’ve started paying off your high-priority debt, think about what your next steps will be, using the same process. Depending on how much you can dedicate to paying off your debt, you can tackle multiple balances at once. You can use this credit card payoff calculator to see how much it will take for you to become free of credit card debt. Keep yourself in check along the way by reviewing your credit scores, which should improve as you pay down credit card balances and make on-time payments. You can get two of your credit scores for free on Credit.com, with updates every 14 days.

Making a plan is one thing, but you have to stick to it in order to reap the benefits, and that can be rchallenging.

“There’s no easy way to do this,” Hunt said. “You have to get serious about money. … You cannot continue the lifestyle that got you into this mess.”

Allow yourself to enjoy the sight of shrinking balances on your account statements, and use that as motivation to keep moving toward your goal.