Which Debt Should You Pay Off First? Here’s What to Consider

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Updated on Wednesday, December 5, 2018

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One of the most common questions consumers ask regarding paying down debt is which debt to pay off first. If you’ve recently made the decision to pay off your debt, you may be wondering the same thing.

There are multiple ways you can tackle your debt, and each strategy has pros and cons. This guide will walk you through some common debt payoff methods as well as how to determine which approach is the best in your situation.

Which debt you should pay off first? 7 factors to consider

When helping clients figure out which debt to pay off first, Chantel Bonneau, a San Diego-based wealth management advisor with Northwestern Mutual, takes a holistic look at their debt and financial picture.

“It’s a little bit math-based, but it’s a little bit customized to the client’s specific needs and situation,” she told MagnifyMoney.

Many factors contribute to how long it will take you to pay off your debt. Here’s what to consider when trying to determine which debt to pay first:

  1. Total amount of debt: The total amount of debt you have plays a role in choosing which to pay off first. If you are paying down $10,000 versus $100,000, you may approach your payoff differently.
  2. Minimum payment due: Each time you pay off a debt, you free up money in your budget to go towards your other debts, so take the minimum payments into account.
  3. Interest rate: Your debts mostly likely represent a range of interest rates. Naturally, the rate of each debt plays a role in how long it will take to pay it off. Also, consider promotional or introductory rates that you can leverage.
  4. Term of debt: The scheduled length of each debt makes a difference in how long it will take to pay it off.
  5. Type of debt: The type of debt you have and whom you owe it to should also be considered.
  6. Status of each debt: If you are past-due or delinquent, you may want to consider prioritizing those debts.
  7. How much you have available to put toward the debt: The amount of extra money you have available to pay down your debt will determine the time it will take to pay everything off.

In addition to looking at these quantifiable factors, your emotional and behavioral needs come into play.

“If I feel like someone will get discouraged or lose energy or not be motivated if they’re not getting rid of that $400 credit card payment that actually isn’t high-interest but it really annoys and frustrates them, then that’s when you have to take the behavioral component into account with how best to approach debt,” Bonneau said.

How to approach your debt

Let’s use an example to take a look at a few different debt payoff strategies. Let’s assume in the chart below that this is a married couple with six debts they want to pay down. They have an extra $200 each month to put towards their bills.

Here are their debts in no particular order.

Debt

Total Balance

Interest Rate

Minimum Payment

MasterCard

$450

18%

$15

Visa #1

$2,500

23%

$73

Visa #2

$5,000

31.99%

$184

Student loan

$45,000

4.25%

$235

Family loan

$1,300

0%

$0

Auto loan

$9,185

7%

$353

We’ll see how each debt payoff method prioritizes their bills.

Debt snowball

The debt snowball repayment method is a popular strategy championed by many personal financial experts, most notably by Dave Ramsey.

In the debt snowball method, you list your debts in order from the smallest balance to the largest. You pay the minimum payments on all of the debts, except for the debt with the smallest balance.

On that debt, you pay as much as possible, using any additional money you have until the balance is paid in full. Once that first debt is paid off, you take the payment you were paying on it, plus any additional money you have, and move onto the next debt.

You continue this pattern as you work your way down your list with the amount you pay on each debt (your snowball), getting bigger and bigger as you go. By the time you get to the debts towards the bottom of the list, the amount of money you’re paying on each debt will have grown significantly.

Here’s how the couple in our example would prioritize their debt using the debt snowball.

 

Debt

Total Balance

Interest Rate

Minimum Payment

#1

MasterCard

$450

18%

$15

#2

Family loan

$1,300

0%

$0

#3

Visa #1

$2,500

23%

$73

#4

Visa #2

$5,000

31.99%

$184

#5

Auto loan

$9,185

7%

$353

#6

Student loan

$45,000

4.25%

$235

With the couple being able to put an extra $200 toward their debt, they would pay off their first debt in just about two months.

The debt snowball method does not take interest rates into account; rather, it plays on the psychology and emotion of paying off debt. The primary goal of this method is to provide “quick wins” and keep you motivated throughout the payoff process.

“The debt snowball is about the momentum of getting rid of your debt,” Bonneau said, though she warned that mathematically, it may not work to your advantage. “At the end of the day, you can be paying significantly more in interest.”

Pros

  • You pay off your first debt pretty quickly
  • You build up momentum as you go
  • You see continuous progress
  • It’s simple and organized

Cons

  • You may pay more in interest
  • It may take longer

Debt avalanche

Another way to approach paying off your debt is using the debt avalanche method. Also called debt stacking, the goal of the debt avalanche is to pay the least amount of interest on your debt. Using this method, you put your debts in order from the highest interest rate to the lowest.

Similar to the debt snowball, you pay the minimum payments on all your bills, except instead of focusing on the smallest debt, you focus on the debt with the highest interest rate until it’s paid off.

After that bill is paid in full, you then move to the debt with the next highest rate and work your way down.

Here’s the order in which our couple would pay their debts using the debt avalanche.

 

Debt

Total Balance

Interest Rate

Minimum Payment

#1

Visa #2

$5,000

31.99%

$184

#2

Visa #1

$2,500

23%

$73

#3

MasterCard

$450

18%

$15

#4

Auto Loan

$9,185

7%

$353

#5

Student loan

$45,000

4.25%

$235

#6

Family loan

$1,300

0%

$0

On paper, this method comes out ahead of the debt snowball in terms of paying the least amount of interest and taking the least amount of time. You can plug in your debts in a snowball versus avalanche calculator to see how the two methods compare in your situation.

Bonneau usually looks to the debt avalanche when helping clients figure out what debt to pay off first. “Generally speaking, paying off the highest interest rate debt first will help your debt become reduced as quickly as possible,” she advised. “Any excess dollars that go towards interest longer than they have to is obviously not productive.”

But while this strategy looks best in theory, it doesn’t always work in reality, as Bonneau cautioned — “mathematically, the avalanche method will have you pay the least amount of dollars to get rid of the debt, but that might not be true if you slip up or if you don’t do your due diligence.”

In addition, she suggested that consumers can also get discouraged when using this method because it may not feel like they’re making progress right away, especially if their debt with the highest interest rate also happens to have a very large balance.

Pros

  • You’ll pay less in interest
  • You’ll pay your debt off faster

Cons

  • It can take a long time to pay off your first debt
  • You may give up
  • It does not take behavior or emotion into consideration

Debt snowflake

The debt snowflake is another method. The goal with this strategy is to leverage the power of making small payments towards your debt.

With this approach, you make multiple micropayments towards each of your debts, even if the amount of the individual payment is less than the minimum amount due (however, you do want to make sure that the multiple payments cover at least the minimum amount due).

If you have extra money to put towards your payments, then you select one debt to focus on.

The idea behind this strategy is that the small payments add up. If someone is struggling with budgeting large sums to put towards their debt, this approach may work for them.

In our example, the couple wouldn’t prioritize their debts in any order; they would make payments as often as they can regardless of the amount.

Bonneau said she doesn’t recommend using the debt snowflake as a primary way to tackle debt, but mentioned that it can enhance an existing approach. “I don’t I think it’s a method comparable to the avalanche or the snowball,” she said. “I think it’s an ancillary or peripheral method.”

Pros

  • Small payments can add up
  • It’s good for those who have a hard time budgeting their payments

Cons

  • Can be confusing and disorganized
  • You can possibly pay less than the minimum payment

Debt tsunami

No one is quite sure why debt payoff strategies all have weather-related names, but now we come to the debt tsunami. This strategy focuses purely on the emotion behind paying off debt.

In the debt tsunami, you rank your debts in order of their emotional impact, prioritizing the debt that you want out of your life the fastest.

Suppose in our example, the couple’s family loan is to their parents or in-laws. If the relationship has soured because of the loan, then they would pay that $1,300 debt off first, even though there is no interest and no minimum payment.

They would attack that debt with a vengeance — like a tsunami — until it’s gone, then move on to the debt that will provide them with the next biggest emotional impact.

Pros

  • Provides emotional relief
  • Builds momentum

Cons

  • You could pay more in interest

Hybrid

You could approach your debt payoff by combining any of these methods, or by taking your own unique approach.

When Steven Donovan, a Miami-based financial coach, decided to pay down his $100,000 of debt, he started using the debt snowball method. But when he discovered that the minimum payment on his $19,000 private student loan was going to triple from $70 to $210, he turned to the debt tsunami.

“I hated that student loan so much that I made I sure I paid it off before the smaller loans in the debt snowball,” Donovan told MagnifyMoney. “It made me happier to pay it off than to knock out the smaller debts.”

With a hybrid approach, you could choose to follow one debt payoff strategy, but you can then prioritize a debt for one reason or another.

In Donovan’s case, he used the debt snowball method and prioritized a debt for the emotional benefit. Another example is using the debt avalanche method, but prioritizing a small debt even if the interest rate is lower — you can get a quick win while building up some momentum to continue paying your debt.

Similarly, you could prioritize debt because of its urgency: for example, paying a federal student loan or tax debt to avoid wage garnishment. Using a hybrid approach allows you to customize your strategy.

Pros

  • Gives you flexibility as you pay off your debt

Cons

  • It could throw you off a consistent pattern

Equal treatment

Another way to approach paying off your debt is to give them all equal treatment. Like the debt snowball and the debt tsunami, you make the minimum payments on all your debts, but instead of applying the extra payment to one particular debt, you spread the amount equally over all your debts.

Pros

  • You pay extra on all your debts

Cons

  • You won’t see significant progress on one debt

Debt consolidation

Debt consolidation is another strategy you can use to pay off your debt. In this method, you would get a single new loan or credit card, and you use that to pay off all the other debts.

The goal with debt consolidation is to save interest and reduce both your total monthly payment and any anxiety or stress of dealing with multiple creditors. Debt consolidation can be done in various ways including a credit card balance transfer, a personal loan, a home equity loan or a HELOC.

Bonneau said she has worked with clients who successfully used debt consolidation, but cautioned that the primary motivation of consolidating debt should be to reduce interest and not just to feel better.

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  • May save interest
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  • One loan could be more manageable

Cons

  • You could pay more in interest if you consolidate low or no interest loans
  • You could extend the amount of time you’re in debt
  • You could lose protections on federal debt

Paying off your debt

These strategies, while different from each other, all have the same goal — to get you out of debt — and the one that’s best for you is the one you’re going to stick with. Consider what will keep you motivated as you pay down the debt.

If seeing immediate progress gets you excited about paying down your debt, then go with the debt snowball method. On the other hand, if a logical and mathematical approach appeals to you, the debt avalanche might work better for you. If you prefer some flexibility, then consider a variation of any of the methods we covered.

“Everyone is different,” Bonneau said. “At the end of the day [a debt payoff strategy] only works if you set goals to have accountability, if it’s realistic to implement, and if you are tracking it.”

Regardless of the strategy you use, make the most of it by putting as much as possible towards your debt. Seek ways to bring in additional income, and create a monthly budget to make sure every available dollar goes towards your debt.

“Make sure you set yourself up for success by putting those external factors in place to help you stay committed to your priority,” Bonneau advised.

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