Debt Consolidation
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How to Decide Which Debts to Pay Off First

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If you’re trying to pay off different types of debt, you may be wondering which to tackle first. In general, you should first pay off high-interest debt, plus any secured non-mortgage debt. After that, some payoffs might personally benefit you more than others.

Take a look below for guidance on deciding exactly which debt to pay first, as well as strategies to help you become debt-free.

Before prioritizing debt, take stock of what you owe

Bills that must be paid first

Before deciding which debts to pay off, make sure you can first pay for necessities like housing, food and transportation, as well as any dues you are legally obligated to pay, like child support or taxes.

Types of bills you should make at least the minimum monthly payment on include:

  • Mortgages and rent
  • Auto loans and car insurance
  • Utility payments like electricity, gas and water
  • Court-ordered payments, like alimony, child support and criminal fines
  • Other legal obligations, like taxes and most student loans

With secured debts like a mortgage or auto loan, you risk losing your home or car if you fall behind on payments. Legal obligations like child support also come with risks if you don’t pay, such as wage garnishment, seizure of a bank account or even jail time.

Good debt vs. bad debt

All debt is not the same. In fact, some debt is generally thought to be “good” debt, while others can be considered “bad” debt.

In general, good debt helps you build wealth or work toward a future goal. For example, a mortgage allows you to own property that can build equity over time. Bad debt is the kind of debt that can be difficult to get out of, or that has long lost its value. A common example of bad debt is a revolving credit card balance — a credit card’s typically high-interest rate can make even small purchases expensive over time while making it harder to bring your balance down to zero.

Which debt should you pay off first? That depends on your priorities

Once you’ve addressed basic living needs and high-priority debts, decide how much you can afford to put toward paying down your overall debt load. This is also the time to decide which debts might provide the biggest benefit once they’re paid off, so consider the following as you continue to prioritize:

Ways to prioritize debt repayment
Repayment method Why you might choose to
By interest rate Loans with two- or three-digit APRs can cost you a lot in interest and might keep you locked in a cycle of perpetual debt.
Based on whether the debt is secured or unsecured Secured loans like mortgages and auto loans require you to put up collateral, so you’ll lessen the chances of losing a home or car if you pay off this type of debt first. On the other hand, unsecured debt like credit cards can come with higher interest rates, making them more expensive in the long term.
By late payment history If you’ve missed payments, you might make it a priority to catch up. A history of missed payments can do serious damage to your credit history.
By size of balance Some borrowers prefer to focus on paying down the debt with the smallest balance first — regardless of the interest rate. Eliminating one debt quickly can keep you motivated.
By minimum monthly payment amount Getting rid of a debt with the highest minimum monthly payment first might free up more of your budget to put toward other debts.
Based on how much credit is still available on a credit card Using more than 30% of the credit available to you on a credit card can bring down your credit score. To give your score a boost, consider paying down what you owe so it’s below this utilization ratio.
By emotional impact Owing money to your friends or family can put relationships in jeopardy. If that’s the case, it might make sense to pay up to avoid long-lasting damage.
By potential benefits if debt remains unpaid Sometimes it doesn’t make sense paying off certain types of debt instead of others. For example, under certain circumstances, your student loan might be eligible for federal Public Service Loan Forgiveness or a similar forgiveness program.

Paying off debt based on the interest rate

Often the best way to pay off debt for long-term savings is to pay off your highest-interest balances first — this approach is often referred to as a debt avalanche. With this strategy, you keep paying the monthly minimums on all your debts, but also put in an extra amount toward paying off the debt with the highest-interest rate. Once the balance on that debt has been entirely paid off, you take your extra monthly allotment and put it toward paying off the next highest-interest debt, and so on.

A debt avalanche can be an effective strategy if you’re focused on paying the least amount in interest over time. It can also be the quickest way to pay off debt, as you’ll see below.

Debt avalanche example

To understand how a debt avalanche works, consider a borrower who has the following credit card debts:

  • A credit card with a $20,000 balance, 18.99% APR, and a minimum monthly payment of $517
  • A personal line of credit with a $12,000 balance, 4.5% APR, and a minimum monthly payment of $165

Let’s say this borrower can afford to pay a total of $800 for debt obligations each month. With a debt avalanche, you’d make your minimum payments each month, and apply an extra $118 to the credit card balance (since it has the highest rate). Using the debt avalanche strategy, you’d pay off your debt in 52 months, with a total repayment amount of $41,542.

Comparatively, if this borrower only made minimum payments on their debt, it would take 61 months and $31,191 to pay off their credit card balance alone. Their personal line of credit would cost $14,038 over 86 months. By only paying the minimum, the borrower would pay a total of $45,229, or $3,687 more than with the debt avalanche method, in addition to being in debt for nearly three years longer (34 months).

Paying off debt by the smallest balance

Another way to prioritize debt repayments is to use a debt snowball. Like a debt avalanche, you first pay the minimum owed on every debt, but then you focus extra payments on the loan with the lowest balance. Once it’s paid off, you redirect extra payments toward the debt with the next-highest balance, and so on.

A debt snowball payoff strategy won’t save you as much money over time as a debt avalanche — but it can help build momentum. You can usually pay off your first debt relatively quickly and see continuous progress as you go. If you’re someone who relies on early victories to keep going, a debt snowball might give you the support you need.

Debt snowball exampleFor this example, assume we are working with the same credit card and personal line of credit debt as above. By using the debt snowball method, instead of paying just the minimum balance due on each debt, the borrower would put an extra $118 each month toward the line of credit, which has the lowest balance. In total, you’d pay back $43,994 across both debts over 55 months.

Compared to a debt avalanche, a debt snowball would ultimately cost $2,452 more in interest and take three months longer to repay. Compared to only paying the minimum balance, though, a debt snowball would save you $1,235 and get you out of debt 31 months faster.

Paying off secured debt

Secured debts like mortgages, car loans and home equity loans often come with lower interest rates than unsecured debts like most credit cards and personal loans. This means it might be tempting to delay paying off this type of debt first.

In the case of a mortgage, that could be a good move. For example, prepaying a mortgage might save you less on interest costs overall, but also prevent you from putting that money to better use in an investment that might potentially yield greater returns.

Still, secured debt requires collateral, and you might be worse off financially than before if you were unable to make payments and a lender were to take possession of your property. For that reason, it’s usually better to prioritize paying off most secured debt, especially if it comes with high interest costs. That’s likely to be especially true if you have a payday loan, where you’re typically required to give lenders access to a checking account as collateral and pay triple-digit interest rates.

How to make debt repayment a realistic goal

To free up cash for debt repayment, look to your budget

Budgeting can help you avoid overspending and also find ways to free up money to put toward debt. Creating a budget starts with determining your monthly take-home pay and listing all fixed expenses and debt payments, then deciding how much is left to pay off debt that’s more flexible.

After making a plan, stick to it. For examples of budgeting plans that can help, take a look at this LendingTree guide for how to budget your money.

Debt consolidation can make repayment more affordable

If high interest rates are making it difficult for you to repay debt, one option worth considering is debt consolidation. It means taking on a new debt — like a personal loan or credit card balance transfer — to pay off existing balances with just one monthly payment.

Debt consolidation can rid you of the hassle of staying on top of multiple bills and figuring out which debt to pay off first. Often, it comes with other advantages too, like a lower interest rate or a lower minimum monthly payment. However, these benefits can vary based on the lender and your creditworthiness, so check rates with a variety of lenders to see if this is the best option for you.

Consider asking for help

If you still need help pinning down a debt repayment plan, consider speaking with a certified credit counselor by contacting an organization like the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA). If you have a mortgage and are dealing with financial obstacles, you may also want to speak to your lender. It may be willing to offer you a lower interest rate, or temporarily suspend or reduce your mortgage payments. You may also be able to temporarily defer or halt repayment of a student loan to help you free up cash to manage higher-priority debts.

Check with your lenders to see which options might be open to you. At the same time, remember that even if you temporarily stop making payments on a debt like a federal student loan, interest costs will continue to accrue and eventually cause your balance to grow.


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