Which Debt Should You Pay Off First?

Got debt? Most of us do. Sometimes people fall behind on their payments or rack up more debt than they intended. If you’re struggling to pay bills, you might need to consider debt relief. 

Even if you’re on time with your payments and totally on top of managing your debts, figuring out a plan to pay off your debt is a good idea. But which debts should you pay off first? 

If your debt is out of control, it’s especially important to make a plan and understand which debts to pay off first. Sometimes getting started is the hardest part of paying off debt. If you can plan ahead and map out a clear process for which debts to pay off first, second, and so on, you could make better progress. Deciding which debts to pay off first can feel motivating and empowering. It gives you a clear path forward for how to get rid of debt faster. 

Before starting your debt repayment journey, choose which debts to pay off first and decide on a debt repayment strategy. 

There isn’t just one right way to get rid of debt. It only matters that you start.

How to Choose Which Debt to Pay Off First

Many people choose to start with either the most expensive debt or the smallest outstanding balance. For example, if you have three credit cards with interest rates of 25%, 27% and 29% APR, you might want to pay off the highest-interest card first. Or if you have an auto loan with $2,500 left on it, and $5,000 each on two of your credit cards, you might decide to pay off the smaller balance first—even though it’s a lower interest rate. 

It’s not always easy to decide which debt to pay off first. To make this choice, you need to understand the type of debts you have, their costs, and outstanding balances. Gather all your debt information, including mortgages, student loans, auto loans, personal loans, and credit cards. 

Type of debt

One way to choose which debt you should pay off first is to look at your types of debt—whether your debts are secured or unsecured. 

Secured debt 

With a secured debt, the loan is secured by an asset. You offer something of value to the lender in order to get the loan. The asset that secures your debt is also known as collateral. Home mortgages and auto loans are common examples of secured debt, because the loan is secured by the home or the vehicles. 

Secured debts often have lower interest rates than unsecured debts because the collateral is a financial safety net for the lender. If you fail to repay a secured debt, the lender could take steps to sell your asset and get paid back.

Unsecured debt 

This type of debt has no collateral. With an unsecured debt, the lender has no asset securing your loan (such as a house or car). Instead, an unsecured debt is issued based on your promise to repay. Examples of unsecured debt include personal loans, federal student loans, or traditional credit cards. 

Lenders offer unsecured debt based on your creditworthiness, which is based on your credit score and other factors like your debt-to-income ratio. To get an unsecured loan or credit card, you don’t have to offer anything of value to the lender as collateral.

You’ll likely pay higher interest rates for certain unsecured debts like credit cards because they present a higher risk for the lender compared to secured debts. With unsecured debts, lenders have less chance of recovering any outstanding amounts if you stop paying.  

Which debts should you pay off first: secured or unsecured? 

Whether to pay off secured or unsecured debt first is a personal choice. If you’ll feel great once you own your car free and clear, then by all means pay it off.

But if you have credit card debt and a mortgage, the unsecured debt is probably costing you more. Also, the balance is likely to be smaller than your mortgage balance, which means you could get rid of it sooner. 

Cost of debt 

A big factor in deciding which debts to pay off first is the cost of debt. The best way to measure your cost of debt is to look at your APR for each debt. 

Your annual percentage rate (APR) lets you calculate how much the debt will cost for one year. The APR includes your debt’s interest rate and fees, so on your mortgage, for example, the APR might be slightly higher than the interest rate. You don’t have to worry about complicated calculations. Just write down the interest rate for each debt so you’ll know which ones will cost you more over time.

Outstanding balance

Know how much you owe each creditor. You should also list the required monthly payment for each debt. 

Your credit card statements will tell you your required minimum payment. Just keep in mind that as you pay down your balance, your minimum payment will also go down. If you pay less, it’ll take longer to pay off the debt. It’s a good idea to stick with the same monthly payment, even if you’re allowed to pay less. 

Installment loan minimum payments don’t change as you get closer to payoff.

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Debt Payoff Strategies 

Once you know the details of your debt, choose a debt repayment plan that suits you.

Let’s assume you have the following credit card debts:

Here’s how you can use different repayment strategies to decide how to pay off these credit card debts.

Debt avalanche

A debt avalanche has you pay off your debts starting with the one that has the highest interest rate. The reasoning: You want to first get rid of the debt that’s costing you the most.

In the above example, you’ll make the minimum payments on Card B and Card C. At the same time, you’ll put every spare dollar to Card A. Once you pay off Card A, you’ll put every spare dollar to Card C while making minimum payments on Card B. Then you’ll tackle the last card.   

Paying off the most expensive debt first helps you lower your overall costs. If your high-interest debt is large, using the debt avalanche method might mean it takes longer before you reach the first payoff.

Why do we call this method the debt avalanche? Because it starts slowly and quietly, but then suddenly builds strength and speed, just like an avalanche coming down a mountain. It might take a bit more time to pay off your higher-cost debts first, but eventually you can see powerful results—and you’ll save on interest.     

Debt snowball

With the debt snowball, you pay off your smallest debt balance first and work your way up to the largest balance. You’ll get to your first payoff most quickly, which can be a big motivator to keep going.

In the above example, you’ll start putting every available dollar toward Card C while making minimum payments to the others. Once you pay off Card C, you can move to Card B, followed by card A. 

Pro tip: Remember to make minimum payments on all your debts. Your payment history is the most important item in your credit score calculation. And paying on time helps you avoid late payment fees. 

Why do we call this the debt snowball method? Because it lets you build momentum starting from a small amount, just like rolling a snowball around in the yard. Over time, the momentum gathers and grows. 

Debt consolidation loan

Debt consolidation uses one loan to pay off multiple loans or credit cards. With debt consolidation, you combine multiple debts or credit card balances in one place, often at a lower interest rate. Paying off a debt consolidation loan can simplify your finances.  

This method could also save you money if the new loan’s APR is lower than the APRs for your other debts. Your debt consolidation loan interest rates will typically depend on your credit history. 

There are several ways to consolidate debt:

• Personal loan. With this type of debt consolidation loan, a lender will offer you an APR based on your credit score and the total size of the debts that you want to consolidate. If your credit is fair or better, personal loans can often help you save money on interest vs. credit cards. Personal loans are typically unsecured debts.

• Home equity loan. Home equity is the difference between what your home is worth (the market value) and your mortgage balance. For example, if your home is worth $350,000 and your mortgage balance is $200,000, you have $150,000 in equity. Home equity loans are secured debts.   

• Credit card balance transfer. Some credit cards offer zero interest or very low interest for a period of time, typically 12 to 18 months. If you’re not paying interest, your entire payment will lower the balance you owe and you could get rid of debt sooner. The interest rate will jump up to the regular rate after the promotional period ends.

Pro tip: When you apply for a new credit account, lenders make a hard inquiry into your credit profile, which is likely to temporarily lower your credit score. Some lenders offer prequalification with a soft inquiry, meaning you can check out your options without it showing up on your credit report or affecting your credit score.

Pros and cons of debt repayment strategies

Which debt repayment method should you choose?

The best debt repayment strategy for you depends on the best fit for your personal finances and your overall personal style of managing money. Choose the method that feels best to you so you’ll be more likely to follow through. 

If you can stay disciplined, the debt avalanche method might be a good option because of the cost savings. 

For some people, the debt snowball method works the best. Getting to the first win quickly can help you keep going.  

If you’re overwhelmed with debt payments or having a hard time tracking multiple debts, debt consolidation might be an ideal strategy. It’s a good option if you can lower your overall interest charges. 

How to Pay Off Debts in Collection

Are you getting contacted by debt collectors? Don’t worry. You can negotiate with collection agencies to reduce your debt.   

If you haven’t paid your loans or credit cards in several months, your debt might be with a collection agency. This happens to many people. If debt collectors are bothering you, there are different ways to deal with collection agencies. 

You can negotiate with them yourself. If you’re not comfortable doing so, you can hire a professional debt relief company to help you. 

Start sooner rather than later. Sometimes it’s possible to settle your debt after a lawsuit is filed but it can be easier to negotiate before a judgment is in place.