At a Glance

If you’re swimming in debt and feel so overwhelmed you don’t even know where to start with repaying what you owe, you’ve probably wondered which debt to pay off first.

Depending on your ultimate financial goal, you might take a different approach to what bills or debt you’ll start paying off first. If you want to raise your credit score, for instance, your debt repayment strategy will be different than if you want to become debt-free faster.

How to prioritize your debt

When thinking about paying off your debt, it can be difficult to know where to start. However, before you start paying off debt or even determine which to pay off first, you must first prioritize your debt.

For example, some of your debt may be considered “good debt,” such as mortgages or student loans. These would be your lowest priority debts because ultimately, they are good for the economy. On the other hand, “bad debt” like personal loans, credit cards, auto loans, and similar debt should be prioritized.

Going a step deeper, here are some things to consider:

1. Interest rates

Think about which of your loans and debt has the highest interest rates. For example, student loan rates may be around 7.5% or less while credit card rates can reach 20% or more. Personal loan rates can range between 4% and 36% depending on your qualifications and other factors.

Your debt that has the highest interest rates will likely want to be prioritized first because you’ll be paying more in interest on those balances.

2. Balance after payment

Debt takes time to pay off, but smaller debts can be repaid faster than larger ones. While your total balance may still be high, completely paying off smaller debts can help you feel more accomplished and motivated to continue paying off the larger ones.

3. Defaulting consequences

Are you at risk of defaulting on your debt? If so, these will want to take priority. For example, defaulting on your mortgage can mean you lose your home, so this may be prioritized over an unsecured personal loan. Or, paying off a loan so it doesn’t go to collections may take priority over credit card debt. Consider how severe the consequences are of not repaying the debt and prioritize from there.

4. Tax breaks

Tax breaks can include credits, reductions, or exemptions and may be offered with loans such as mortgages and student loans. These loans are tax deductible, allowing you to reduce your taxable income.

How to determine which loan to pay off first

Before you determine which debt to pay off first, you’ll need to decide which strategy you’re going to implement, whether that’s the debt snowball method, debt avalanche method, or a hybrid approach. Once you know which tactic will work best with you, that will reveal what you should pay off first.

1. Debt snowball

The debt snowball method, popularized by a 60-year-old straight, cis, white, Evangelical Christian man (no, not your dad), is when you throw as much money as you can at your smallest debt balance, regardless of interest rate, while paying the minimum amount due on all your other debts.

The thinking with this method is that despite paying more interest in the long haul, you’ll likely get motivation from small victories along the way that will keep you on track toward paying off your debt.

2. Debt avalanche

The debt avalanche method is almost the exact opposite of the debt snowball approach. Instead of paying off your debt by lowest to highest balance, you’re paying off your debt by highest to lowest interest rate.

Let’s say you have four loans or credit cards with the following APRs: 6%, 11%, 16%, and 21%. You’d start with the debt that has a 21% APR, putting as much money as you can afford toward that balance, while paying the minimum on every other debt. Then you’d work your way down to the loan with a 6% APR until you’re completely debt-free.

With the debt avalanche method, the goal is to save as much money as possible. But it’s not necessarily a good fit if you don’t have a lot of extra dough laying around to put even more money toward your high-interest debt. Not to mention, if the balance is particularly large, you might feel like you’re going nowhere fast.

Related: Debt Snowball vs. Avalanche – Which is Right for You?

3. Hybrid methods

If paying off your debt by balance or interest rate like with the debt snowball and debt avalanche approaches doesn’t sound like the best fit for you, you can kind of hack the system and try a hybrid debt payoff method:

  • Use different approaches for small and large balances (e.g., use the snowball method on debts under $1,000 and the avalanche approach on debts $1,000 or above).
  • Change it up if you have a hefty extra income (e.g., put a big work bonus toward debt repayment).
  • Try the debt-to-interest ratio strategy, a.k.a. the “debt spiral” (i.e., take each debt balance and divide it by the current interest rate to calculate the debt-to-interest ratio. Start by paying the debt with the lowest debt-to-interest ratio and working your way toward the highest debt-to-interest ratio).
  • Decide what to pay off first by type of debt (i.e., secured vs. unsecured debt, installment loans vs. revolving debt).

What order should you pay off your credit cards?

What a segue, am I right? Credit cards are the most common form of revolving debt, which means you don’t owe a set amount every month like you would with an installment loan. Instead, the amount you owe, or your minimum monthly payment, will change as you pay off and take on more debt.

If you’re only dealing with credit card debt and don’t have other loans mixed in, well, good for you. But also, this could impact which approach you choose. If you have multiple credit cards, the difference in your annual percentage rates (APRs) might be negligible, in which case you might want to think about paying off either your highest balance first and working your way toward the card with the lowest balance, or vice versa.

Should you pay off your highest credit card balance first?

If you have enough saved up in an emergency fund and won’t need to deplete savings to pay off debt—something you don’t want to do—paying off your highest credit card balance first could be in your best interest. See what I did there?

Should you pay off small credit card balances first?

Paying off your smallest credit card first could be your best approach if you don’t have a ton saved up and you need to chip away at your debt with the snowball method.

What bills to pay first during a financial crunch

If money is tight, you will need to shift your priority to paying down debt, not paying it completely off. You can’t skip debt payments without taking a serious hit to your credit or suffering other consequences, so when funds are limited, you’ll need to carefully order your debts by seriousness of consequence.

Debts that have the most severe consequences of default should be paid first. This includes:

  • Mortgage: This should be your top priority because if you miss payments, you could lose your house. Similarly, if you rent and miss your monthly rent payments enough, you may be kicked out of the apartment.
  • Child support: Not only is it important to support your offspring, you could go to jail if you don’t make your payments.
  • Taxes: The longer you go without paying your taxes, the more severe the consequences. First, you’ll be charged fees up to 25% of the amount you owe. While you won’t go to jail if you don’t pay them, you could get audited and if the IRS determines you have the funds to pay, you’ll face bank levies, wage garnishments, and other consequences.
  • Auto loans: Missing your car payment not only impacts your credit, it puts you at risk of losing your vehicle.
  • Credit cards: Try to make at least the minimum payment each month. Otherwise, your credit score will suffer and you’ll owe much more in interest.
  • Personal loans: While unsecured personal loans don’t have any collateral you can lose, it can have a huge impact on your credit score and you could be sent to collections. This can make it much more difficult to qualify for funding in the future.

Lower priority payments during a financial crisis include:

  • Student loans: Federal student loans give you options when your financial situation isn’t ideal, such as being put into forbearance or deferment. This can give you some time to get back on your feet, but you will have to start making payments again eventually.
  • Collections debts: These shouldn’t be ignored because of the impact they can have on your credit and ability to qualify for loans in the future, but if you already have debt in collections, you may be better off prioritizing other debt so you don’t have even more in collections. However, if the collections agency threatens to take you to court, you’ll want to shift your priority.
  • Medical bills: Medical debt also shouldn’t be ignored, but in most cases you have some time to repay them. There also isn’t any interest adding to the total cost of your debt. Ask your provider about payment plans or other options if you find you’re having difficulty paying your bills.

How to best pay off debt

There’s no one-size-fits-all best way to pay off debt. The best approach will differ from person to person, but ultimately, it’s whatever strategy actually works for you. If you’re motivated by the small wins involved with the debt snowball method and that keeps your momentum going, then snowball it up. If saving money on interest in the long term with the debt avalanche approach helps you stay on task, then maybe that’s your best bet.

FAQs

Having no debt isn’t bad for your credit score as long as there’s other activity on your credit reports. For example, maintaining open and active credit accounts, even if you pay off the balance each month. However, if you have no debt and no credit accounts, your score may be damaged. Having a little debt can also help your score as long as you make the payments each month.

Not necessarily. While the psychological implications of paying off small loans first are great, you could be forfeiting more money toward interest payments down the road.

Generally speaking, no. You should almost always pay at least the monthly minimum on all your debts to avoid tacking on late fees and further compiling interest.

If an old debt has reached collections, you’ll probably want to pay that first, assuming the statute of limitations hasn’t passed. The statute of limitations can vary from state to state and by type of debt, but generally it’s about three to 15 years. Benefits of paying off old debt include decreasing your debt-to-income ratio, eliminating unpaid collections that could negatively influence your credit score, and a higher likelihood of getting approved for new credit in the future.

Usually, credit cards have higher interest rates than personal loans and other installment loans, so if you’re more concerned with paying off the highest interest rate first, you’ll probably prioritize paying off a credit card. If it’s a secured loan, meaning you’ve put up collateral, you’ll want to pay that off first to avoid losing your car, house, savings, etc.

If you’re more concerned with limiting the amount of interest you owe overall, you should pay off high-interest loans first. In other words, use the debt avalanche method.

As long as you’re able to make your minimum monthly payment on your car loan, you’re probably better off focusing on your credit card debt, as that will likely have the higher interest rate. By focusing on your credit card debt, you can help boost your credit score (more on that below).

Paying off credit card debt can help you raise your credit score because it allows you to lower your credit utilization ratio, which is a big contributing factor to your credit score.