Home > Managing Debt > Which Debts Should You Pay Off First?

Comments 2 Comments

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 30 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.

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • http://www.credit.com/ Credit.com Credit Experts

    Good for you. Figuring out which method makes the most sense for you (and that you will follow) is a big part of the battle!

  • Prism

    Thank you for the article. I always thought student debt was the safest. I am now going to concentrate on that first before I pay off my secured debts. I dont have much credit card debts. I pay off that monthly.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team