Which debt should you pay off first?

If you’re like lots of people, you may have different bills you pay every month. They might include things like mortgages, personal loans, student loans and credit cards. 

If you’re trying to manage and eliminate multiple debts, it can help to make a plan. Learn more about which type of debt to pay off first, debt-payoff strategies and how reducing debt could help you take control of your finances.

Key takeaways

• Debt can get expensive when interest compounds over time. 
• Outstanding debt can make it harder to qualify for other loans and credit cards.
• There are a number of strategies for paying off debt, including the avalanche method and the snowball method.
• Deciding whether to first focus on high-interest debt or eliminate smaller balances can help determine which method might be best.

Ever wondered about how to get out of debt? Or which debt to pay off first? If you have different types of debt—like a mortgage, personal loan or credit cards—a number of factors can be involved, including the interest rate and balances on each account.

It can be helpful to come up with a plan for eliminating debt—because paying it over months or years can get expensive, or even make it more expensive. That’s because interest charges can really add up over time.

It may help to start by listing your debts with their outstanding balance, minimum monthly payment and interest rate. You could also consider a few other factors as you create a debt-payoff plan: 

Highest-interest debt

If the goal is to reduce interest, it could help to pay off the debt with the highest interest rate first. If this is your plan, it may help to keep this in mind: If the debt with the highest interest rate is also your largest balance, it may take a while to pay it off.

Highest loan balance

Another option is to pay off debt with the highest balance first, especially if the loan is accruing interest. That’s because interest applied to a high-balance loan could be costly over time.

Debt that can lower your tax bill

Some debts may help lower your tax bill—like when you qualify to deduct some or all of the interest you pay on them. For instance, the IRS allows homeowners to deduct the interest paid on their mortgages in some situations. The IRS may also allow student loan interest to be deducted. 

When people have debts that could lower their tax liability, they may decide to pay off their other balances first. That way, they could take advantage of the tax breaks.

Debt that most affects your credit score

While any debt typically has the potential to affect credit scores, some may have a larger impact. One example is carrying high balances on revolving credit accounts, including credit cards. The technical term is credit utilization ratio. And according to the Consumer Financial Protection Bureau, experts recommend keeping your credit utilization below 30% of your total available credit.

After making a list of debts and exploring factors that might help you decide which debt to pay off first, it might help to explore a few common strategies, with their pros and cons.

Avalanche payoff method

The avalanche method is based on paying off high-interest debts first. To do that, make the minimum payment on all your debts every month, and then put any extra money toward your balance with the highest interest rate. Depending on your situation, that could mean paying off credit card debt first. 

Once you pay off the balance with the highest interest rate, you could continue the “avalanche” by targeting your debt with the next-highest interest rate, and so on. 

Snowball payoff strategy

The snowball method is about prioritizing small debts first, with the goal of eliminating them as quickly as possible. Once one small balance is eliminated, you can move on to the next-smallest balance until they’re all paid off.

Compared to other methods, this one may save you less money in the long run. But the “snowball” effect can  provide frequent small victories to boost momentum. 

Debt payoff with consolidation

Debt consolidation involves getting a payoff loan to combine some or all of your debts into a single monthly payment. In addition to simplifying the bill-paying process, debt consolidation may also help you save money. That could happen if the interest rate on your loan is lower than the rates on some or all of your debts. 

It may help to keep in mind that debt consolidation may involve fees and other costs. That’s something to consider and budget for as you decide which debts might be worth consolidating.

Debt payoff with refinancing

If refinancing is a possibility, you might be able to lower your interest rates and change other terms of your loan. Ask your lender if this option might make sense for you. And be sure to consider how fees and other changes associated with refinancing might affect your decision.

When you have numerous debts, paying them off over months or years can be costly. There are multiple ways to prioritize debt, but it’s still important to keep up with all your bills. That way, you keep your accounts in good standing, minimize late fees and avoid negative credit score impacts. 

You may find that you have more options and freedom as a result of paying down debt. They could include the ability to make major purchases and finding ways to save as you pay off debt.