Which Debt Should You Pay Off First?

If you’re juggling different types of debt, you’re not alone. Having multiple types of debt is very common, and many people wrestle with which debt to pay off first when each is accruing interest.

If you’re looking to pay off one of your accounts or change how you manage your debt, there are a few steps to consider. Here are some ideas that may help you make the best decision for both you and your financial goals.

Assess and organize your debts

Before you decide which debt to pay off first, it’s helpful to organize your information, so you have a better overview of your finances. To start, make a list of all your current debts. You can write a list by hand, make a spreadsheet or use an online template. Here is some key information to include:

Type of debt	These could include personal loans, credit cards, auto loans, student loans, mortgages, taxes, medical bills or any other bills that accrue interest
Total balance	How much you still owe on a debt
Annual percentage rate (APR)	The yearly cost of borrowing money, including interest and fees
Minimum payment	The smallest amount you must pay each month to keep your loan in good standing
Monthly due date	The deadline to pay each month
Final payoff date	For installment loans, the date when your debt will be fully paid off, assuming you make all payments as scheduled

Once you have all the information in one place, experiment with different ways to organize your debts. You might sort them by either the balance size or APR from largest to smallest, or vice versa. Then, you may be better able to assess how to move forward.

Determine what debt to pay off first

Which debt you decide to pay first may depend on a few factors:

• Interest rates: Your interest rate affects the total cost of your loan or line of credit over time. Typically, the longer it takes to pay off a debt, the more you’ll pay in interest.
• Balance sizes: A large balance may take you longer to pay down, while paying off a smaller balance may be more achievable in the short term.
• Monthly payment amounts: The more you’re putting toward paying off your debt each month, the less cash you’ll have on hand for day-to-day expenses.
• Payment history: If you have delinquent debt, prioritize getting up to date. Late fees can add to your debt and impact your credit, and past-due accounts can be sent to debt collectors.
• Type of debt: If you have any secured loans, which are backed by collateral (something of value you possess, like a car), you risk losing the collateral if you miss payments. And if you owe tax debt, you may face consequences like wage garnishment if you don’t repay.

How you prioritize these factors is up to you, but it’s important to keep each account in good standing and continue to make the minimum monthly payments on all your debts while focusing on which debt to pay off first.

Decide which debt management strategy makes sense for your budget

Once you’ve decided how to prioritize your debt, it’s time to choose a repayment strategy. Two of the most common strategies are the debt snowball and the debt avalanche methods.

Debt snowball method

With the debt snowball method, you focus on paying off your smallest balance first. Continue to make minimum payments on all your other debts but put any extra funds you have toward the smallest debt until it’s paid off. Then, you’ll put the money you had been spending on the first debt toward paying down the next smallest debt on your list. Continue in this way until all your debts are paid in full.

Since you may be able to pay down smaller debts more quickly, this method may give you a sense of accomplishment and motivation to keep going. The debt snowball method may be a good fit if you’re looking to quickly reduce the number of debts on your balance sheet.

Debt avalanche method

Alternatively, you could consider the debt avalanche method, which focuses on paying off the debt with the highest interest rate first. Like with the debt snowball method, you’ll still need to make minimum payments on all your debts. Once your highest-interest debt is paid off, you can put that money toward the debt with the next highest interest rate.

The debt avalanche method could help reduce how much you spend on interest over time, potentially saving you money in the long run. Consider which method is more likely to motivate you to keep going as you chip away at your debt.

Debt consolidation loan

A debt consolidation loan combines multiple debts into one manageable monthly payment. You may be able to lower your interest rate or get a longer term to pay down debt, which may lead to lower monthly payments.

For example, if you owe $10,000 on one credit card and $5,000 on another, you could take out a debt consolidation loan to pay off those accounts. Then, you pay back the loan in predictable monthly payments, subject to a fixed interest rate, over a set period of time. Factors like your credit score and income will determine your exact terms, but a debt consolidation loan could help simplify your debt and free up more room in your budget. OneMain offers debt consolidation loans from $1,500 to $30,000.

Credit card with a balance transfer offer

If you’re looking to lower your interest rate, you might look into a credit card with a balance transfer offer. A balance transfer allows you to move debt from one credit card to another, and some cards may offer an introductory or promotional APR period, meaning you’ll pay low or no interest for a set amount of time.¹

Moving your debt from a credit card with a high interest rate to one with a temporary promotional APR could help you save on interest. However, you’ll want to make a plan to pay off as much of your transferred balance as possible before the promotional period ends. After that, any remaining balance will be subject to the card’s higher, non-promotional APR.

A credit card with a balance transfer offer may have a balance transfer fee, often around 3-5% of your balance. Be sure to confirm the details with the card issuer ahead of time.²

Discussing repayment terms with creditors

If you’re experiencing financial hardship and having difficulty making your minimum payments on time, you could consider contacting your creditors. In some cases, you may be able to negotiate a lower monthly payment, a lower interest rate or more time to pay back what you owe.

Keep in mind that your lender may not agree to change your terms, and if you reach an agreement to repay less than you owe, your credit score and taxes may be affected. However, communicating with your creditors is a smart step, especially if you’re at risk of missing payments.

50/30/20 budget rule

Adjusting your monthly budget could also help you find a way to allocate more money toward paying down your debt. The 50/30/20 budget rule is a simple approach to organizing your after-tax income that involves putting 50% toward your needs, 30% toward your wants and 20% toward savings and debt repayment.

Using the 50/30/20 framework may help you better understand where your money goes each month and whether you have any flexibility to put more toward paying off debt.

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Create a plan that works for you

No matter how much or what kind of debt you have, it’s important to make a payoff plan that works for your situation. Collect key information about each debt and organize it in one place, prioritize which debts are the most important to pay off first, choose a repayment strategy — or experiment with a few different ones — and stick to your plan so you don’t fall behind. If you have any delinquent debts, aim to pay those first. Be sure to consistently make minimum payments on time so you stay in good standing with your lenders.

There’s no one-size-fits-all solution to paying off debt, and it may take time to find the best solution for you, but planning is the first step in the right direction.

Sources

1,2 https://www.bankrate.com/credit-cards/balance-transfer/balance-transfer-guide/#how-does-a-balance-transfer-work