Paying off debts can be a daunting task. Whether you find yourself knee-deep in credit card debt, struggling to make ends meet every month, or desperately wish that you could pay off those student loans, there is hope. Once you’re ready to tackle them though, how do you know which debts to pay off first?
3 Ways to Calculate Which Debts to Pay Off First
There are a few methods to determine which debts to pay off first, based on what your goals are and how immediately you need results. Understanding these methods will help you better tackle any debt.
1) In Order of Interest Rate
One method for paying off debts is to rank your debts in order of the interest rate. It makes sense to pay off the debts that are accruing the most interest first since those are the ones that can end up costing you the most in the long run. However, some people find this demoralizing. The highest-interest debt is often your largest one, too, which means that it can take months or a year to pay it off, making you feel like you’re not really making progress.
A note here about student loans — they are typically one of the lower interest debts, so making the monthly payments on them should be enough while you work to pay off your other debts. Of course, do your best not to fall behind on payments, but don’t stress over paying ahead on them.
2) In Order of Balance
This method was popularized by radio host Dave Ramsey, known to many for his budgeting and financial advice. He calls this technique the “debt snowball.”
Starting with the smallest debt (typically credit card balances or car payments), you put any extra funds toward paying it off while making the minimum payments on all other debts. Once the lowest balance debt is paid off, you move on to the next one! This method is motivational because you feel like you’re actually gaining traction and making progress. Instead of getting discouraged a few months into your efforts, you can see immediate results and keep yourself going.
If you’re unsure which debts to pay off first, this one is my absolute favorite. And you know what? Even Harvard agrees with me on the debt snowball. When in doubt, pay your debts smallest to largest.
3) In Order of Credit Limit
The third method for paying off your debts is to do so in order of how close you are to the credit limit for that debt. This often means paying off credit cards first and leaving any other payments until later. If you are looking to improve or maximize your credit within the next few years, paying off credit cards can be vital to that goal. The easiest way to rank your debts for this method is by percentage, looking at the ratio of your debt to the credit limit. This will require your continually reevaluating the order, as they will change from month to month.
Related: How to Get Out of Credit Card Debt
Still Not Sure Which Debts to Pay Off First? Just Get Started!!
As you can see, there are a few different ways you can tackle your debts. Picking the “right one” isn’t really all that important. What’s important is that you just get started!! If you do nothing, you’ll stay in debt forever. If you pick one of the three options above and tackle your debt with a vengeance, then you’ll probably succeed…even if you did pay $30 more in interest vs. another method.
The important thing is to get out of debt and invest for your future.
So who really cares which debts to pay off first? Just get started today!