How should I prioritize paying off my debts? (2024)

FAQs

How should I prioritize paying off my debts? ›

Consider the snowball method of paying off debt.

The two most popular strategies are to pay off balances with the highest interest rates first or to pay off the lowest balances first. The former will save you more money over the long run, but the latter can help you keep momentum and see progress.

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.

As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced is accelerated.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

The debt avalanche method focuses on paying off your highest interest rate debt first. You start by listing your debts in order of interest rate, from highest to lowest. You focus on the debt with the highest rate while maintaining minimum payments on the others.

“Consumers can and should do both.” Even if you're working on paying down debt, building a healthy savings fund can help you avoid adding to that debt. Having an emergency fund reduces the financial burden when the unexpected happens, even if you start with a small amount and save slowly.

How to pay off $20k in debt fast? ›

Use a debt consolidation loan

This allows you to make one monthly payment rather than paying multiple creditors. You may also get a better rate compared to your credit card APYs, saving you money in interest. A debt consolidation loan is especially useful if you are trying to pay off multiple credit cards.

Get in touch with a debt relief service

And, debt relief services typically help you in one of two ways: debt consolidation or debt forgiveness. If you choose a debt consolidation or debt management program, experts will typically try to negotiate your interest rates and payment terms with your lenders on your behalf.

Key points on 0% credit cards

When your introductory or promotional offer comes to an end, your remaining balance will be charged at the card's standard rates. To avoid paying higher interest rates, plan ahead and try to pay off your balance in full before the 0% offer ends.

Let your interest rates guide you when deciding in which order to pay down debt. That usually means sending any extra money toward credit card debt first, then personal loans, student loans, car loans and, lastly, your mortgage.

A debt avalanche is a type of accelerated debt repayment plan. Essentially, a debtor allocates enough money to make the minimum payment on each source of debt, then devotes any remaining repayment funds to the debt with the highest interest rate.

Paying off the debt on the card with the highest interest rate first is one method to reduce credit card debt. This is called the “debt avalanche method.” While some advocate for paying off your smallest debt first because it seems easier, you may save more on interest over time by chipping away at high-interest debt.

Tackling your credit card debt first will also give you a better shot at improving your credit score. Revolving credit is highly influential in calculating your credit utilization rate, which is the second biggest factor (after payment history) that makes up your credit score.

In general, it's best to pay off credit card debt first, then loan debt, since credit cards often have the highest interest rates. When you prioritize paying off credit card debt, you'll not only save money on interest, but you'll potentially improve your credit too.