How To Prioritize Your Bills: What Debt To Pay Off First
- Establishing a debt payoff strategy is key to managing multiple debts and ultimately becoming debt-free.
- Popular debt payoff strategies include the avalanche and snowball methods, which are based on interest rates and the amount of money owed.
- Saving while paying down debt is possible. It can improve financial security and keep you from adding to your debt through continued borrowing.
When you’re juggling multiple debts, the order in which you pay them off can make a big financial difference. Your basic necessities — utilities, food, rent, mortgage, etc. — should always come first. Beyond that, prioritizing the right bills can help you avoid late fees, protect your credit score and reduce the amount of interest you pay over time.
What bills should you pay first?
If money is tight, triage your financial priorities in roughly the following order, focusing first on survival expenses such as housing, transportation, and basic necessities.
1. Housing (mortgage or rent)
Housing expenses should be your top priority, since keeping a roof over your head protects every other aspect of your financial life. On the flip side, falling behind on rent can lead to eviction, while missed mortgage payments can eventually result in foreclosure.
2. Utilities
Electricity, water, gas and internet services should be next on your priority list, since shutoffs can create costly disruptions and may require deposits or reconnection fees to restore service. Bills for “fun” services such as streaming subscriptions or meal delivery services do not fall into this category unless you actively use them for work or school.
3. Car payment
If you rely on your vehicle to commute to work, keep up with your auto loan payments whenever possible. Missing car payments could lead to repossession, making it harder to earn income and stay current on your other obligations.
But if you don’t need a car or can downgrade to a less expensive option, it may be wise to consider alternatives such as public transportation while you prioritize paying off debt.
4. Delinquent accounts
Once you’ve prioritized your financial needs for everyday life, focus on paying off any past-due accounts as quickly as possible. Delinquent accounts can trigger late fees, collection activity, and significant damage to your credit score. You may be able to negotiate each account to settle for a lower amount than you owe.
5. High-interest unsecured debt
Once your essential bills are covered and delinquent accounts are current, focus any extra cash on high-interest debt such as credit cards, payday loans, or personal loans. The balance on these types of debt balloons very quickly due to high rates of interest, making them significantly harder to pay off the longer they sit.
6. Lower-interest unsecured debt
Lower-interest debts, such as some student loans or personal loans, generally cost you less money to carry for longer periods. Continue making minimum payments while prioritizing higher-cost balances first.
If paying off debt feels overwhelming, you’re far from alone. Many Americans are struggling with rising costs and growing debt balances.
According to a recent LendingTree survey, 72% of Americans say the economy has made it harder to pay their bills, and nearly half say they’ve paid a bill late within the past year.
Meanwhile, the nationwide average consumer debt rose 3.7% year over year, reaching nearly $140,000. These numbers highlight just how common financial challenges have become.
Should you build an emergency fund or pay off debt first?
Many people assume they need to choose between saving money and paying off debt. In reality, doing both is often the best approach.
If your income isn’t stable, it’s wise to prioritize saving to build a safety net. You can still pay down your debts and save, but focus first on high-interest debts to free up your cash more quickly.
Here’s how you can save and pay off debt at the same time:
- Build a small emergency fund first. Start by setting a savings goal of $500 to $1,000 for unexpected expenses like car repairs or medical bills. You should also create a system, like automating transfers or setting aside a specific amount of cash every week, that will allow you to easily reach your savings goal.
- Prioritize your high-interest debt. Direct extra funds toward your high-interest credit cards or loans. You’ll make the minimum payment every month, but any additional money you put toward the balance reduces the interest and principal balance faster.
- Continue contributing to savings while paying down debt. Once the high-interest debt is repaid, you can continue to tackle other debts and contribute to savings. Put away as much as your budget allows, even if it’s no more than $50 to $100 per month.
| Pay off debt first if … | Build savings first if … |
|---|---|
| You have credit card debt with high interest rates (around 20% or higher) | Your income varies significantly month to month |
| You're consistently making all required payments on time | You have little or no emergency savings |
| You already have a starter emergency fund | You frequently rely on credit cards for unexpected expenses |
| Interest charges are preventing you from making meaningful progress | You're concerned about potential job loss or reduced income |
The best debt payoff strategies by situation
Here are some common debt repayment methods that can help you get started:
Debt avalanche method
Best for borrowers who want to pay the least amount of interest possible
The debt avalanche method prioritizes paying off your highest-interest debt first. You’ll continue making minimum payments on all other accounts while putting every extra dollar toward the most expensive debt. Once that balance has been eliminated, you’ll move on to the debt with the next-highest interest rate.
Out of this list of options, the debt avalanche method allows you to pay the least amount of interest, often helping you become debt-free as quickly as possible. However, this method can take longer to see results depending on how your debt is allocated, which can feel disheartening for some people. If you thrive on ongoing rewards and affirmation, the next option may be a better fit for you.
Debt snowball method
Best for borrowers who want motivation boosts and quick wins
The debt snowball method creates a series of small wins for you at the beginning of your debt payoff journey.
In contrast to the debt avalanche, this strategy focuses on paying off your smallest balance first, regardless of interest rate. After eliminating the smallest debt, you’ll roll the payment you previously allocated to that first debt toward the next-smallest balance.
The debt snowball can create momentum by helping you see results quickly. However, you may pay more in interest over time than you would with the debt avalanche method. But the additional interest paid is well worth the cost if the psychological boost helps you stick with your repayment plan.
Paying off debt can positively affect your credit score, particularly if it lowers your credit utilization and helps you maintain an on-time payment history. The factors that make up your credit score include:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit mix (10%) (keeping some accounts open can actually help here)
It’s worth noting that paying off and closing certain accounts may cause a temporary score drop, even if it improves your overall financial health. This is normal and will not impact your credit history in the long run.
Debt consolidation
Best for borrowers with multiple high-interest debts who qualify for a lower rate
Debt consolidation combines multiple debts into a single new loan. Instead of managing several payments and due dates, you’ll make one monthly payment on a new loan. It can be an efficient way to streamline multiple debt payments into a single one, ideally at a more affordable interest rate.
The debt consolidation method may be best if you have multiple balances with high annual percentage rates (APRs) and different payment dates, such as debts across multiple credit cards or a variety of student loans. However, your credit history and finances may impact your ability to qualify for a debt consolidation loan. As a result, these loans will not be available to some people.
| If you … | Try this method … |
|---|---|
| Have multiple high-interest credit cards and good credit overall | Debt consolidation or debt avalanche |
| Are motivated by quick wins | Debt snowball |
| Have large credit card balances with high APRs | Debt avalanche |
| Are struggling to manage multiple due dates and different debt accounts | Debt consolidation |
| Have limited extra income but several small debts | Debt snowball |
| Have a good credit score and stable income | Debt consolidation or debt avalanche |
| Have recently missed payments and are feeling overwhelmed | Prioritize delinquent accounts first, but may need to consider debt relief or credit counseling |
| Have variable income and little savings | Build emergency savings first, then use debt avalanche |
How to pay off debts fast: Step by step
Regardless of your debt repayment method, this checklist will help you stay consistent with your strategy of choice.
1. Organize your debts
Create a list that includes:
- Current balances across all debts
- Minimum payment amount for each account
- Due date of each monthly payment
- Interest rate or APR of every loan
Seeing all of your financial details in one place makes debt easier to prioritize.
2. Categorize debts by urgency
Separate essential obligations, such as housing and transportation, from debts like credit card balances and student loans. Cover all of your critical bills before allocating extra money toward debt repayment.
3. Find ways to cut back
Review your recent spending and identify expenses you can temporarily reduce. Subscription services, dining out and impulse purchases are common areas where borrowers find extra cash for debt payments.
4. Decide on a debt payoff strategy
Based on your goals and financial situation, choose the debt avalanche, debt snowball or debt consolidation approach. You can also mix and match at different times as long as you stay consistent about paying off what you can.
5. Create a new budget
Budgeting apps such as YNAB or Monarch Money can help you track spending, set goals and identify money that can be redirected toward debt payments.
6. Allocate money according to your plan
Make minimum payments on all accounts and direct any extra funds toward your chosen target debt. Consistency is more important than perfection.
7. Reassess every three months
Review your progress on a quarterly basis since your income, expenses, and interest rates can change over time. Re-evaluate your strategy at each check-in and adjust as needed to stay on track. Of course, you can reassess more frequently if you wish, or at any time when your finances experience a major change such as an emergency, a layoff or a raise.
Frequently asked questions
Generally, the best credit card to prioritize paying is the one with the highest interest rate. This approach minimizes interest charges and helps you save money over time. However, some people may prefer focusing on paying off the smallest balance first to enjoy the affirmation of clearing a debt.
Compare the interest rates of any debts you owe to decide which one you should pay first. In most cases, credit cards carry significantly higher APRs than personal loans, making them the better target for extra payments. Continue making minimum payments on both accounts while prioritizing the higher-cost debt.
For most borrowers, a balanced approach works best. Build a small emergency fund first, then focus aggressively on high-interest debt while continuing to contribute modestly to savings.
Making only minimum payments keeps your account in good standing, but it can significantly extend your repayment timeline and increase the total amount of interest you pay. When only minimum payments are made, high-interest credit card debt can take years — or even decades — to eliminate.
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