So you want to pay off debt, but you’re not sure what debt to pay off first.
Let’s talk about it, my friend.
There are two main approaches to paying off debt — The Debt Snowball and The Debt Avalanche.
These sound like technical money terms, but they’re super easy to understand. Here’s some debt advice that can help you decide what debt to pay off first. (Keep in mind, these are just suggestions to help you create your own debt repayment strategy. What will work for you will depend on your situation. Ready, set, go!):
The Debt Avalanche — Start With the Most Expensive Debt
The Debt Avalanche is when you pay down the most expensive debt first. Your most expensive debt would be the debt with the highest interest rate.
You make at least the minimum payment on all of your debt, but the debt with the highest interest rate is where you put any extra money even if that balance is pretty high. (If you’re having trouble finding extra money to put towards debt, check out this post.) Let’s look at an example.
Say you have credit cards and an auto loan that you want to pay off:
- Debt #1 : Credit card – $35,000, Interest rate – 20% APR
- Debt #1 : Auto loan – $5,000, Interest rate – 5% APR
In this case, you would work on tackling the credit cards first because it’s the most expensive debt with the highest interest rate. The reason behind this method is that the higher interest debt is costing you the most money, so you want to eliminate it first.
In theory, this all makes sense because of the savings aspect. However, your highest debt could also be a HUGE debt. That’s a lot to tackle first, and you won’t get much immediate reward. That’s where the second method comes in!
The Debt Snowball — Start With the Smallest Balance First
This method is when you pay off the smallest debt first regardless of how much the interest rate is. You still make at least the minimum payment on your largest debt balances but you focus on the smallest debts.
The momentum of this method resembles a snowball. The benefit of making your debt payments this way is that you get the motivation to keep going. The smaller debts paid off gives you the early wins that make you want to keep going with your debt pay off plan.
Let’s look at the same example above:
- Credit card – $35,000, Interest rate – 20% APR
- Auto loan – $5,000, Interest rate – 5% APR
In this case, you would pay off the auto loan first even though it costs you less. It’s a smaller debt that you can pay off faster. After crushing the auto loan, you can move onto the credit card debt.
I lumped the credit card debt altogether in this example. But in real life, you may have many credit cards. You would pay off the ones with the smallest balances until you’re debt free.
What about some credit card debt solutions?
If you decide to do the Debt Snowball method, it may be a good idea to find solutions to reduce the cost of your more expensive debts. Credit card debt or payday loans, in particular, can be VERY expensive.
You could try a balance transfer credit card to consolidate your debt and lower the interest rate for a period. Balance transfer cards have a low-interest or 0% interest period that gives you some breathing room while you pay it off. Otherwise, finance charges can put a wrench in your debt pay off plan.
Another option is consolidating with a personal loan. Personal loans can have interest rates in the 6% to 20%ish percent range depending on your credit.
Good credit may land you a remarkably low interest rate on a personal loan when compared to your credit card. Don’t sit on very expensive debt if you don’t have to! A budget is also going to be a huge help when you pay off debt.
Final Word — Do You Boo, Boo
There’s no right or wrong answer when it comes to paying off your debt. You should do the method that makes sense for you. Maybe you can start out with the Debt Avalanche and then try the Debt Snowball later.
I did the Debt Snowball because it worked for me but I’m not opposed to other plans as I pay off more debt! Also, having debt isn’t terrible. If you have a mortgage, you don’t necessarily need to break you back paying it completely off unless it makes sense for family. Same thing goes with your student loans.
Yes — student loans suck. But that doesn’t mean you need to put your entire life on hold to repay student loans if you don’t want to. It’s your choice!
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