Which Debt Should You Pay First?

Written By Jeff Hindenach
Last updated February 12, 2020

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April 28, 2016

Simple. Thrifty. Living.

There are two general schools of thought when it comes to which debt you should pay first. Neither way of thinking is better than the other. The approach you take simply depends on your preferences and the factors that best motivate you to keep paying down debt.

One approach is to work on the debt with the highest interest rate first. All things considered, this is the approach that you should take if possible, since it will save you the most money in the long term. High interest rates are a huge financial drain, and the sooner you get rid of debts that carry these rates, the better. For instance, suppose you have four debts, a mortgage at 4.3 percent interest, a student loan at 8 percent interest, a credit card at 13 percent interest and a car loan at 5 percent interest. With this approach, you would pay off the credit card first then move on to the student loan.

However, there is a valid reason why you might not want to use this approach. It’s psychological. People like to see progress being made, and if the debt with the highest interest rate is also large and will take years to pay off, you could become discouraged. If this seems likely with your personality style, consider the approach below.

You can also try to lower your interest rate in order to pay less in interest. One option is to consolidate your debt into one loan with a lower interest rate. Some debt relief companies can help you do that. You can also try to fix your credit score, either on your own or with one of the best credit repair agencies, in order to raise your credit score and lower your interest rate offers.

The second school of thought encourages you to pay down the debt with the smallest amount first. This approach offers mental boosts on several fronts; you’re wiping out debts more quickly and owe fewer companies/lenders. So, if you have four debts, a mortgage that you owe $100,000 on, a student loan you owe $3,500 on, a credit card you owe $8,500 on and a car loan that you owe $7,000 on, you would pay back the student loan first because it is the smallest amount. Afterward, you would move on to the car loan and then to the credit card debt.

However, before you begin focusing on one particular debt, ensure that you have an emergency fund that covers three to six months of living expenses. Otherwise, you risk having to go further into debt if an emergency occurs.

If your debts are too overwhelming to decide between the highest-interest debt or the smallest debt, you can also hire a debt relief company to help you settle or consolidate your debts. Debt consolidation will help you consolidated your debts into one, lower-interest loan. Debt settlement will negotiate with lenders to help you settle your debts for less money. Here is our list of the best debt relief companies, including our Accredited Debt Relief reviews and National Debt Relief reviews that take in-depth looks at the top-rated companies.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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