Which Debts Should I Pay Off First?
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Fast Facts
U.S. Household Debt:
Topped $17.987 trillion
Credit Card Usage:
Average U.S. consumer has 3.9 credit card accounts
Highest-Interest Debt:
Prioritize to save on interest costs
Smallest Balance Debt:
Focus on quick wins for motivation
Debt Consolidation:
Combine debts for lower interest rates and simpler payments
Credit Card Debt:
Pay off in full monthly to avoid high interest and fees
Debt doesn't just affect some Americans, it's a mass affliction. U.S. household debt topped $17.987 trillion in the first quarter of 2024, with mortgage, auto loan, and credit card balances all registering year-over-year increases, according to the New York Fed. Worryingly, delinquencies have begun to tick up after falling to historic lows during the pandemic as the U.S. government pumped money into the economy.
Record-high inflation is forcing many people, especially low-income individuals, to turn to debt to afford essential daily items. But they soon find out that having a bad credit score and a loan do not mix well. For one, you're not eligible for most loans, and when you are, you'll be paying more in installments over a shorter period, making it more likely for the borrower to become delinquent. Payday loans are an example in this scenario.
Many people have more than one credit card. Indeed, an average U.S. consumer had 3.9 credit card accounts as of April 2024, Experian data shows. Paying off multiple credit cards, coupled with other forms of debt, can be an overwhelming task. Different due dates can aggravate the situation. But debt-free doesn't just simply involve making monthly payments; that won't get you anywhere, and you'll remain in debt longer.
Some debts take preference over others, and here is a general overview of things to consider when deciding which debt to pay off first.
In this article
How much do you owe?
Assessing your debts' value (or the monthly payment amount) is important. Once you have a clear idea of the total amount of debt you owe, you can calculate the minimum payment required for each loan and add them together to determine your total minimum monthly payment.
If you have multiple debts with different interest rates and monthly payments, your payment amount will depend on the total amount due on each account. Keep in mind that payments that are applied to balances with a lower interest rate than your current rate may be applied to balances with a higher interest rate. Finally, if you have any credit card balances with a promotional interest rate, you may need to make larger payments than usual to pay off the promotional balance before the regular rate kicks in.
Knowing how much debt you have can help determine how you can allocate extra money once it's available. For example, if the money will go toward student loans worth more than other debts, you could put that extra money toward those loans. Or, if you'll have a lower monthly payment if you pay extra toward your credit card balances, you could put the money toward them. Regardless of the answer, you'll want to make sure that you make your payments on time every month to avoid penalty fees and damage to your credit.
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Which debt has the highest interest rate?
There are certain types of debts that have higher interest rates than others. Credit cards typically have the highest interest rates of any debt type, so you'll likely want to pay these off as quickly as possible to reduce your borrowing costs. Mortgages and auto loans typically have lower interest rates than credit cards, so they can be paid off quickly without costing as much in interest charges.
In addition to choosing which debts to pay off first, you'll need to consider determining which accounts have the higher interest rate. In some cases, the interest rate will be listed next to the account balance, making it easier to see which is higher. In other cases, you may need to log in to your account to find the information.
What can you do to reduce interest rates?
There are several ways to reduce your debt interest rates and increase your ability to pay them off faster. You could get a debt consolidation loan, which will allow you to combine all of your debt into a single loan with a lower interest rate. You could also find a low-interest credit card or line of credit that you can use to pay off your other debt. This may allow you to lower your monthly payments and reduce your overall interest expenses.
Another option would be to sign up for a debt management plan with a credit counseling agency. The agency may be able to negotiate lower interest rates and help you make lower monthly payments on your outstanding debts. Some agencies also work with creditors to help pay off your debt faster. Finally, you can refinance your loan to take advantage of a lower interest rate if your current one is too high.
Related: How to Consolidate Debt
Debt Consolidation Calculator
Which debts should I pay off first?
The highest-interest debt
Paying off some of your highest-interest debts first can help you jump on your debt payoff and give you a better chance of reaching your goal on time. Also known as the debt avalanche, this method can help you reduce the interest you pay over the life of your loan and save a significant amount of money over time. The avalanche method may also prevent you from getting into a debt spiral in which you’re continually adding new debt to your existing debt just to make minimum payments on your larger loans. By paying off your high-interest debt first, you may free up some money that you can use to pay down the rest of your debt more quickly or save it toward your emergency fund.
The smallest balance debt
This debt repayment method is also called the debt snowball method. While using the debt avalanche method, you focus on debts with the highest interest rates, here, you'll target debts with the smallest balance. While it may take longer to become debt free under the snowball method and you could potentially pay more interest, this method ensures you remain on track and keeps you motivated. To make it work, you should make minimum payments on every debt you owe and add a little extra towards the debt with the lowest balance.
Consider debt consolidation
A debt consolidation loan can provide you with a lower interest rate and may reduce your monthly payments. This repayment strategy can make it much easier to pay off your debt faster and save a lot of money on interest payments. It also gives you a single payment to deal with each month and help you stay organized when it comes to making your monthly loan payments. In some cases, a debt consolidation loan may also make it easier for you to qualify for a loan if you’re having trouble qualifying for other loans due to your credit score or other issues. However, it's important to keep in mind that these loans often have shorter terms than other types of loans, and they generally have a higher interest rate than those offered by traditional lenders.
Pay off credit card debt
Credit card debt can be one of the worst types of debt because credit card companies often charge a high-interest rate and tack on additional fees and charges that can add thousands of dollars to your total debt over time. The average credit card APR is currently about 18%, which is significantly higher than the average rate on most other types of loans.
The best way to avoid these high-interest rates and fees is to pay your credit card debt in full every month rather than making payments on the balance each month. By paying your card balances in full every month, you'll avoid accruing interest and won’t have to worry about any additional fees that can come with making only partial payments. Paying off your credit card balances as soon as possible can also reduce your overall debt burden and make it much easier for you to save money in the future.
Related: How to Pay Off $10,000 in Debt
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Tips for dealing with credit problems
- Pay on time: Your credit score is important when qualifying for loans and credit cards. It can significantly impact your ability to get approved for credit like a personal loan. That’s why it's important to maintain a good credit score by paying all your bills on time. Late payments can hurt your credit score and increase your interest rate.
- Keep an eye on your credit report: If your score has taken a hit because of recent financial problems, you may be able to take steps to improve it in the near future. One way to get started is to check your credit report for any errors or mistakes that could negatively affect your score. Once you have received your credit report, you should check it for any signs of fraud or identity theft that may need to be addressed immediately. If you notice any issues with your credit score that needs to be corrected, you should contact the credit bureau.
- Set up autopay: You should also consider setting up automatic bill pay on your accounts so you don't have to worry about missing a payment because you misplaced the bill or forgot to make a payment.
- Avoid opening new credit card accounts: When you apply for a credit card, companies do a hard inquiry, affecting your credit score. You should try to limit the number of cards you have open at any given time to two or three. You should also keep credit utilization low.
FAQs
What is debt?
Debt is money borrowed by one party from another, typically used to make large purchases that they could not afford under normal circumstances. Common forms of debt include loans, credit cards, and mortgages.
What are the types of debt?
Debt can be categorized into secured debt (backed by collateral, like a mortgage or car loan) and unsecured debt (not backed by collateral, like credit card debt and student loans).
What are the consequences of not repaying debt?
Failing to repay debt can result in late fees, higher interest rates, damage to your credit score, and legal action. Severe cases may lead to bankruptcy, which has long-term financial consequences.
How does interest work on debt?
Interest is the cost of borrowing money, expressed as a percentage of the principal. It can be fixed (unchanging) or variable (fluctuates with market conditions). Understanding interest rates is crucial for managing debt.
What is debt consolidation?
Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. This can simplify payments and potentially reduce the overall interest paid.
The bottom line
There are a lot of considerations to make when it comes to debt repayment. Some people might prioritize debts that are easier to pay off, while others might choose to focus on debts with higher interest. Which debt should be paid off first depends on the details of your situation. But before making a decision, you first need to identify the various types of debt you have and the value of each.
After you have locked that down, try to avoid missing any payments while you are paying off your debts so your credit score doesn't suffer as a result of late payments. Once you've decided on a debt repayment plan, you may feel like you're off the track. But if you'd like to get out and meet your financial goals, you should stick to the game plan. With a little planning and the right strategies, you should be able to pay off your debt and save more money over the long term.
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- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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