What Debt Should I Pay Off First?

Quick Answer

It's best to tackle tax debt and debt in collections first to avoid legal issues. After that, consider these strategies:

  1. Prioritize debt with the highest interest rate
  2. Focus on debt with the smallest balance
  3. Concentrate on revolving debt
  4. Consolidate your balances
  5. Evaluate your spending habits
A woman laying on the couch and paying off debt.

If you're dealing with a lot of debt, it can be hard to know how to prioritize paying it off. To avoid legal issues, it's best to prioritize any tax debt or debt in collections. Beyond that, your approach may depend on your financial situation, objectives and long-term goals. For instance, you may prioritize paying off a car loan so you're free of a car payment, or you may want to tackle looming credit card debt.

Regardless of which approach you take with your debt, however, the most important thing you can do to pay off your debts is to create a plan and follow through with it. Here are five strategies you can consider to determine the best path forward for you.

1. Prioritize Debt With the Highest Interest Rate

Prioritizing debt with the highest interest rates can potentially help you save more money on interest. The highest-interest debt you have is likely credit card debt, but other accounts, such as payday loans, can also charge very high interest rates. Review the terms of each account to see which ones have the highest interest rates.

You can prioritize your high-interest accounts using the debt avalanche method. It works like this: Make just the minimum monthly payment on all of your accounts except the one with the highest interest rate. With that account, put all of the extra money you can afford to pay it down faster.

Once you've paid off the balance on the account with the highest interest, take all of the money you were putting toward it every month and apply it to the one with the next-highest rate in addition to the minimum payment you're already making. Again, you'll continue to pay just the minimum on your other accounts.

Repeat this process with each account until all of your debt is paid off.

2. Focus on the Debt With the Smallest Balance

While focusing on your debts with the highest interest rates first can help you maximize your interest savings, it can be challenging to stay motivated if you're dealing with high balances. With the debt snowball method, you'll prioritize your smallest balances, allowing you to gain quick wins early on in the debt payoff process.

As you might've guessed, this approach works mostly the same as the debt avalanche method with one key difference: Instead of focusing on your balance with the highest interest rate first, you'll pay down your smallest balances first.

3. Concentrate on Revolving Debts

If you have credit card debt or a line of credit, a high balance could result in a high credit utilization rate, which can damage your credit score. By targeting your revolving debts first, you can lower your utilization rate, thereby helping to increase your credit score.

Additionally, revolving debts typically have low minimum payments, and making just the minimum payment severely prolongs how long it will take to pay off these accounts. Tackling them first can eliminate the potential for these accounts to disrupt your debt payoff plan.

Finally, revolving debts typically come with variable interest rates, which fluctuate over time. If interest rates are on the rise, paying down revolving debt first can help you minimize the impact of higher rates on your budget.

4. Consolidate Your Balances

As you pay down your debt, consider whether there's a way to refinance some of your debt at a lower interest rate. This may be possible if your credit has improved since you first took out the debt. And if you have good credit, you may be able to qualify for a balance transfer credit card with an introductory 0% APR promotion or a debt consolidation loan with a low interest rate.

Check your credit score and research opportunities to consolidate or refinance your high-interest accounts. This process alone won't solve your debt problem, but it can make it easier to manage, save you money and help you become debt-free sooner.

5. Evaluate Your Spending Habits

If you've racked up a lot of debt through overspending, assessing and revising your spending habits will have a much greater impact on your long-term financial well-being than paying down debt because it can help you prevent the same thing from happening again.

If you have credit card balances, for instance, you may decide to stop using your cards while you work to pay down your debt to avoid slowing down the process.

Also, take a look at your spending habits and pinpoint areas where you can cut back. If possible, use some of this cash flow to make larger debt payments to accelerate your payoff plan.

Monitor Your Credit as You Pay Down Debt

Regardless of how you decide to tackle your debt, monitoring your credit score throughout the process can help you understand how your efforts impact your credit. You can also learn ways to maintain the progress you make through good credit behaviors.

With Experian's free credit monitoring service, you'll get access to your Experian credit report and your FICO® Score powered by Experian data. You'll also receive real-time alerts every time something on your credit report changes, so you can stay on top of potential problems as they come up.