What Debt to Pay Off First?

Posted on April 02, 2025 by Kayla Harris

Managing multiple debts is becoming a common practice. While paying them off comes with many benefits, from increasing your credit score to freeing up cash, it’s important to determine what you should pay off first to make the most of your finances. Let’s explore several strategies so you can choose the one that best suits your situation.

Table of Contents

1. Different Types of Debt and Their Characteristics
2. The Importance of Prioritizing Debt Payments
3. How to Decide What Should I Pay Off First?
4. Factors to Consider When Prioritizing Debt
5. Conclusion

Different Types of Debt and Their Characteristics

Knowing how different types of debts work will help you prioritize your debt repayment. Here are several loan comparisons to help you figure out which loan to pay off first.

Fixed-Rate Debt vs. Variable-Rate Debt

As the name suggests, fixed-rate loans come with APRs that don’t change over the loan life. APRs on variable-rate loans, in turn, can fluctuate under certain market conditions. Here’s a closer look at their peculiarities:

Secured vs. Unsecured Debts

Secured loans require collateral, such as properties, vehicles, or other assets, while unsecured options are advanced based solely on a borrower’s creditworthiness. Let’s take a look at their features:

Revolving Debt vs. Installment Debt

Revolving credit offers borrowers the flexibility to access the funds within a certain limit, repay it, and use the money again. Installment debt provides you with a lump sum that you then repay in equal monthly payments. Here are the key differences between these two options:

The Importance of Prioritizing Debt Payments

When it comes to debt repayment, careful planning and prioritizing can help you avoid problems and choose the right strategy that aligns with your future financial goals. Here are the major benefits it offers:

Improved credit score: On-time payments make up 35% of your credit rating. Additionally, paying off credit card debts will decrease your credit utilization. Less interest: Eliminating high-interest debts can help you avoid overpayment and decrease the overall financial burden. Financial stability: Repaying your debts will help you get more control over your money and not worry about unexpected situations. More savings: When you pay off your debts, you have more money to save for future goals, such as a home purchase or saving for retirement.

How to Decide What Should I Pay Off First?

There is no right answer. Everyone picks a method that works for them. Consider your loans first. Figure out how much you owe, list the interest rates you pay on each debt, and write down the repayment terms. After that, learn more about various methods available and choose the one that is relevant to your situation. Here’s a detailed look at each option:

Pay Off Debts With The Highest Interest Rates

The principle of the debt avalanche method lies in paying off the debts with the highest interest rate first. At the same time, you must also make minimum payments on other loans. After repaying the debt with the highest APR, you move on to the next highest interest rate loan. In the long run, this helps you reduce overpayment.

Representative example:

You have three debts:

Credit card: $5,000 at 18% Personal loan: $10,000 at 12% Car loan: $15,000 at 8%

Steps for the debt avalanche method:

1. Pay the minimum on your personal and auto loans, but put as much as you can toward paying off your credit card balance.
2. Once you cover your credit card debt, add the sum you’ve paid for it monthly to your minimum personal loan payment to settle it faster.
3. After the personal loan is repaid, focus on paying off your car loan by using the freed up money.

Target the Smallest Debt First

The snowball method is a debt-paying approach that shows you quick results. You start with the smallest debt regardless of interest rate and put any extra money toward it while paying the minimum on all the other debts. Once repaid, move on to the next smallest debt. It helps to create such a “snowball” effect: with every debt paid off, you can see the progress and stay motivated.

Representative example:

You have three debts:

Credit card: $3,000 at 15% Personal loan: $1,000 at 10% Car loan: $5,000 at 8%

Steps for the snowball method:

1. Focus on repaying your personal loan since it has the smallest outstanding balance. Keep paying minimums on other debts.
2. Once the personal loan is paid, put the monthly payment amount toward your credit card debt.
3. Combine your previous payments with the minimum for your car loan to get rid of this debt faster.

Focus on Debts That Affect Your Credit Score

Consider what debt you should pay off first to raise your credit score. If you have any delinquent debt, focus on repaying it first. Although delinquency will stay on your credit report for about 7 years, its impact will reduce over time once you cover the debt. Additionally, focus on your high-balance credit card debts since repaying them will lower your overall credit utilization, potentially improving your FICO rating.

Representative example:

You have the following debts:

Credit card: $2,000 debt (40% utilization), 16% interest Personal loan: $1,500 debt, 18% interest Car loan: $6,000 debt, 8% interest Delinquent debt: $300 unpaid

Steps to follow:

1. Pay off the $300 delinquent debt first to lessen the impact of missed payments on your credit rating.
2. Next, focus on the credit card to reduce utilization from 40% to at least 30% to increase your FICO score.
3. Once the credit card is paid off, move to the personal loan.
4. Finally, pay off the car loan, which has a smaller effect on your score.

Consolidate Debts

This way of managing multiple debts involves combining them into a single one. Instead of paying several different creditors, you get a new loan and use the borrowed amount to pay off all your old debts. Debt consolidation can potentially lower your interest rate (if your credit improves) and reduce monthly payments (due to a lower APR or by choosing a longer repayment term). Use a loan calculator to determine the terms that will balance between an affordable monthly payment and a reasonable total cost.

Representative example:

You have three debts:

Credit card: $2,000 at 20% with a minimum payment of $53.33 (interest + 1% of your balance). Personal loan: $5,000 at 15% for 12 months with a monthly payment of $451.29. Car loan: $3,000 at 10% for 18 months with a monthly payment of $180.17. Total debts: $10,000. Total overpayment (provided that you only make minimum payments on your credit card): $3,382.03.

You take out a $10,000 debt consolidation loan at 12% for 24 months. Now, you only need to pay $470.73 per month, with the total interest paid being $1,297.63. A single payment also makes it easier to manage your finances.

Factors to Consider When Prioritizing Debt

Keep these points in mind when deciding which debt to pay off first:

Interest rates: Focus on high-interest debts first, as they cost you the most over time. Repayment terms: Be aware of any penalties associated with early repayment or special conditions like adjustable rates. Minimum payments: Always cover minimum payments to avoid penalties and protect your credit score. Credit impact: To improve your credit score faster, prioritize debts that increase your credit utilization or leave derogatory marks on your credit report. Tax benefits: Consider the tax implications of your debts; some loans, such as mortgages or home equity loans, may offer deductions. Emotional weight: Repay debts causing stress or affecting personal relationships first to ease mental strain. Loan security: Secured debts should be a priority if there’s a risk of losing essential assets like a home or car. Forgiveness opportunities: If some debts, such as student loans, might be forgiven, consider paying off other debts first.

Things to Avoid While Repaying Debt

Here are the most common mistakes to avoid when managing your debts:

Making Only Minimum Payments

If you only pay the minimum required monthly, you will stay in debt longer and overpay more, especially when it comes to credit cards. Aim to pay more than the minimum to get out of debt faster.

Ignoring High Interest Rates

Some debts cost more because of high interest rates. Paying these expensive debts first will save you money over time.

Not Having a Plan

Paying off debt without a plan can lead to mistakes and slow progress. Decide on the strategy you will use and stick to it. Revise your success and make adjustments when needed.

Using All Your Savings

Paying off the debt with your savings might be very tempting. However, you need to leave a solid emergency fund so you won’t be caught off guard by unexpected expenses.

Adding New Debt

New credit accounts will only make matters worse and will further extend your being in debt. Additionally, they can negatively affect your credit.

Not Talking to Creditors

If you have a low income and can’t make your loan payments, talk to your creditors. They may be able to offer you some options, such as changing or deferring your payment plan.

Forgetting About Credit Scores

Your actions while paying off debt can affect your credit score. Understand the effects of closing accounts or consolidating debt to avoid damaging your rating.

Not Checking Your Progress

Keep track of your debt payments and change your plan if necessary. Your strategy may change in accordance with your financial situation .

Conclusion

When choosing the debt management strategy, one common question is, should you pay off the smallest debt first or focus on the loan with the highest interest rate? The answer is, it depends. If you want to be more motivated and see the progress, use the snowball method to pay off the smallest debts first. The avalanche method suits you most if you’re focused on saving as much as possible. The key is to remember that your goal is to get out of debt. Keep track of your budget and plan for repayment to feel more confident in your finances.

See also:

1. Does paying off a loan early hurt your credit?
2. Tips & tricks for managing debt wisely
3. Why is your credit score going down when you pay on time?

References:

1. What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
2. Debt Management
3. How to reduce your debt
4. What is credit counseling?
5. How To Get Out of Debt