What debt is best to pay off first?
Prioritizing debt by interest rate.
It's best to tackle tax debt and debt in collections first to avoid legal issues. After that, consider these strategies: Prioritize debt with the highest interest rate. Focus on debt with the smallest balance.
Paying off high-interest debt first is commonly referred to as the avalanche method. Keep making the minimum monthly payments on all of your credit cards and loans, but put every extra penny you can toward the card or loan with the highest interest rate.
Pay off the most expensive debts first
Therefore, it's important you prioritise using your savings to get rid of the most expensive debts.
Paying off the debt on the card with the highest interest rate first is one method to reduce credit card debt. This is called the “debt avalanche method.” While some advocate for paying off your smallest debt first because it seems easier, you may save more on interest over time by chipping away at high-interest debt.
- Step 1: Survey the land. ...
- Step 2: Limit and leverage. ...
- Step 3: Automate your minimum payments. ...
- Step 4: Yes, you must pay extra and often. ...
- Step 5: Evaluate the plan often. ...
- Step 6: Ramp-up when you 're ready.
- The snowball method. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt. ...
- Debt avalanche. Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. ...
- Debt consolidation.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
The debt avalanche approach starts with paying off the card with the highest annual percentage rate first. Next, you pay off the card with the second-highest APR and so on.
Debt avalanche: Make minimum payments on all but your credit card with the highest interest rate. Send all excess payments to that card account. Once you pay that account off, send all excess payments to your next highest rate. Repeat until all of your debts are paid off.
Should I pay off my car or credit card first?
In general, it's best to pay off credit card debt first, then loan debt, since credit cards often have the highest interest rates. When you prioritize paying off credit card debt, you'll not only save money on interest, but you'll potentially improve your credit too.
You may save some money with the "avalanche method," but if the principal is large, the time it may take to pay off debt with the highest interest can be discouraging and make it difficult to stick to the plan. Paying off small debts quickly can feel rewarding.
In terms of saving money, a debt avalanche is better because it saves you money in interest by targeting your highest interest debt first. However, some people find the debt snowball method better because it can be more motivating to see a smaller debt paid off more quickly.
First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on. As you work your way down the list, be sure to continue making the required minimum payments on all accounts. The avalanche method can save you both money and time.
Yes, paying off a personal loan early could temporarily have a negative impact on your credit scores. But any dip in your credit scores will likely be temporary and minor. And it might be worth balancing that risk against the possible benefits of paying off your personal loan early.
Focus on your highest interest rate first
It's OK to make minimum payments on the rest of your accounts. Once your highest interest rate account is paid off, focus on paying off your card with the next highest rate and continue to do so until all of your debts are paid off.
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
1% of the balance plus interest: It would take 29.5 years or 354 months to pay off $10,000 in credit card debt making only minimum payments. You would pay a total of $19,332.21 in interest over that period.
Consider the snowball method of paying off debt.
This involves starting with your smallest balance first, paying that off and then rolling that same payment towards the next smallest balance as you work your way up to the largest balance. This method can help you build momentum as each balance is paid off.
- Not changing your spending habits. If you're struggling to pay off debt, you probably need to change your spending habits. ...
- Closing credit cards after paying them off. ...
- Neglecting your emergency fund. ...
- Getting discouraged. ...
- Not getting help when you need it.
How can I pay off my debt smartly?
- Pay more than the minimum payment every month. ...
- Tackle high-interest debts with the avalanche method. ...
- Set up a payment plan. ...
- Put extra money toward paying off your debts. ...
- Start a side hustle. ...
- Limit unnecessary spending. ...
- Don't let your debt hit collections.
- Create a budget plan. Creating a budget plan is a good first step to take, as it allows you to monitor your monthly income and expenses accurately. ...
- Pay more than your minimum balance. ...
- Pay in cash rather than by credit card. ...
- Remove your credit card information from online stores.
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%.
A simple rule about debt is that if it increases your net worth or has future value, it's good debt. If it doesn't do that and you don't have cash to pay for it, it's bad debt.
The bottom line: Credit card debt is considered "bad" debt because of its high interest rates and low minimum payments, and the fact that it isn't used to buy appreciating assets. Use your credit cards for the rewards and other benefits, but pay the balance in full each month.
References
- https://www.cnbc.com/select/credit-card-mortgage-approval/
- https://www.investopedia.com/terms/c/combination_loan.asp
- https://www.caranddriver.com/auto-loans/a43048531/what-credit-score-do-you-need-for-a-car-loan/
- https://www.bankrate.com/real-estate/how-much-house-can-i-afford-70k-salary/
- https://www.investopedia.com/terms/d/debtconsolidation.asp
- https://realestate.usnews.com/real-estate/articles/are-you-too-young-to-buy-a-house
- https://www.experian.com/blogs/ask-experian/what-debts-should-i-pay-off-first/
- https://www.caranddriver.com/auto-loans/a44075567/can-you-refinance-two-car-loans-into-one/
- https://www.quickenloans.com/learn/buying-house-without-your-spouse
- https://www.creditrepair.com/blog/mortgage-and-housing-information/buy-home-california/
- https://www.cnbc.com/select/how-to-calculate-debt-to-income-ratio-for-mortgage/
- https://www.equifax.com/personal/education/credit/report/articles/-/learn/understanding-credit-good-debt-vs-bad-debt/
- https://www.cbsnews.com/news/how-long-will-it-take-to-pay-off-10000-in-credit-card-debt/
- https://stairsfinancial.com/blog/how-much-house-can-i-afford-on-40k-a-year
- https://www.consumerfinance.gov/ask-cfpb/should-i-trade-in-my-car-if-its-not-paid-off-en-2045/
- https://themortgagereports.com/22502/how-to-buy-a-home-50000-per-year-income
- https://www.credible.com/mortgage/what-is-a-second-mortgage
- https://www.cnbc.com/select/mortgage-affordability/
- https://wallethub.com/answers/cc/how-long-to-pay-off-20000-credit-card-debt-1000423-2140858500/
- https://www.meettally.com/blog/how-fast-will-a-car-loan-raise-my-credit-score
- https://www.rocketmortgage.com/learn/1-rule-real-estate
- https://citylendinginc.com/homebuyers/buying-a-home-with-no-down-payment/
- https://www.bankrate.com/loans/auto-loans/how-to-decide-between-bank-or-dealership/
- https://www.cbsnews.com/news/how-long-will-it-take-to-pay-off-5000-in-credit-card-debt/
- https://www.cnbc.com/select/what-is-the-28-36-rule-for-buying-a-home/
- https://www.calculator.net/down-payment-calculator.html
- https://www.cusocal.org/how-fast-will-a-car-loan-raise-my-credit-score
- https://www.cusocal.org/how-much-will-a-car-loan-drop-my-credit-score
- https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/snowball-vs-avalanche-paydown/
- https://www.cbsnews.com/news/5-ways-to-pay-off-5000-in-credit-card-debt/
- https://www.rocketlawyer.com/real-estate/home-ownership/real-estate-financing/legal-guide/buying-a-house-when-you-have-significant-debt
- https://www.bankrate.com/personal-finance/credit/how-to-build-credit-fast/
- https://www.nfcc.org/blog/ask-an-expert-how-can-a-car-loan-affect-my-ability-to-buy-a-house/
- https://assurancemortgage.com/how-many-mortgages-can-you-have/
- https://www.mrcooper.com/blog/can-you-consolidate-credit-card-debt-into-your-mortgage/
- https://www.equifax.com/personal/education/credit-cards/articles/-/learn/should-i-pay-off-my-credit-card-in-full-each-month/
- https://www.rocketmortgage.com/learn/financing-multiple-rental-properties
- https://www.bmcmortgage.ca/blog/will-a-second-mortgage-hurt-my-credit/
- https://www.lendingtree.com/auto/what-credit-score-is-needed-to-buy-a-car/
- https://www.credible.com/mortgage/100000-mortgage
- https://www.gloucestershire.police.uk/SysSiteAssets/foi-media/gloucestershire/policies/unmanageable-debt-policy
- https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/pay-off-debt-faster/
- https://www.chase.com/personal/mortgage/education/buying-a-home/brrrr-method
- https://www.forbes.com/advisor/mortgages/buying-a-second-home/
- https://www.realtor.com/advice/finance/will-car-loan-keep-getting-mortgage/
- https://www.fairwayindependentmc.com/articles/can-you-buy-a-car-before-buying-a-house
- https://www.usbank.com/loans-credit-lines/debt-consolidation.html
- https://www.rocketmoney.com/learn/debt-and-credit/buying-house-help-credit-score
- https://www.cbsnews.com/news/how-much-credit-card-debt-is-too-much/
- https://www.marketwatch.com/guides/car-loans/pay-off-car-loan-early/
- https://money.usnews.com/loans/mortgages/articles/how-many-mortgages-can-you-have
- https://www.quickenloans.com/learn/whats-the-difference-between-a-mortgage-and-an-auto-loan
- https://www.cbsnews.com/news/should-you-wait-to-buy-home-what-experts-say-to-do/
- https://www.nerdwallet.com/article/credit-cards/credit-card-debt-bad-debt
- https://www.chase.com/personal/auto/education/financing/the-pros-and-cons-of-paying-off-a-car-loan-early
- https://www.usatoday.com/money/blueprint/debt/mistakes-when-climbing-out-of-debt/
- https://www.nerdwallet.com/article/finance/credit-score-drop-pay-debt
- https://www.fctd.com/blog/loan-scenario-85/15-seller-financing-plus-hard-money-second-mortgage
- https://www.creditstrong.com/how-fast-will-a-car-loan-raise-my-credit-score/
- https://www.lendingtree.com/credit-repair/how-auto-loan-affect-your-credit-score/
- https://www.investopedia.com/terms/d/dti.asp
- https://www.moneysavingexpert.com/savings/pay-off-debts/
- https://www.fdic.gov/consumers/consumer/moneysmart/podcast/documents/borrowing-money-how-much-mortgage-can-i-afford.pdf
- https://time.com/personal-finance/article/second-mortgage/
- https://www.capitalone.com/learn-grow/money-management/does-paying-off-a-personal-loan-early-hurt-credit/
- https://www.capitalone.com/learn-grow/money-management/highest-credit-score/
- https://www.bankrate.com/personal-finance/debt/which-accounts-pay-first/
- https://www.bankrate.com/mortgages/piggyback-loan/
- https://www.wellsfargo.com/mortgage/learning/getting-started/importance-of-credit-debt-savings-in-homebuying/
- https://www.marketwatch.com/picks/i-have-20k-in-credit-card-debt-and-pay-400-a-month-just-in-interest-im-worried-about-this-large-sum-of-interest-im-paying-what-should-i-do-01675358619
- https://www.commbank.com.au/articles/personal-loans/what-is-debt-consolidation.html
- https://www.mortgageretirementprofessor.com/A%20-%20Qualifying/combine_two_properties_in_one_mortgage.htm
- https://www.marketwatch.com/guides/car-loans/auto-loan-interest-rates-by-credit-score/
- https://www.vosshonda.com/finance/car-buying-tips/does-financing-a-car-build-credit/
- https://www.incharge.org/blog/can-my-credit-score-go-up-100-points-in-a-month/
- https://www.incharge.org/debt-relief/how-much-debt-is-too-much/
- https://money.usnews.com/credit-cards/articles/what-debt-to-pay-off-first
- https://www.myautoloan.com/content-articles/should-you-finance-a-car-through-your-mortgage.html
- https://www.forbes.com/advisor/credit-cards/how-much-credit-card-debt-is-too-much/
- https://www.moneylion.com/learn/auto-loan-consolidation/
- https://www.zillow.com/learn/buying-a-house-with-student-loans/
- https://mymortgageinsider.com/mortgage-applications-should-i-lease-or-buy-a-car-prior-to-applying-for-a-home-loan/
- https://www.cnbc.com/2023/07/06/personal-finance-expert-simple-formula-i-use-before-buying-a-home.html
- https://www.experian.com/blogs/ask-experian/should-i-pay-off-credit-card-or-loan-debt-first/
- https://www.creditstrong.com/how-to-raise-credit-score-by-200-points/
- https://www.bankrate.com/real-estate/buy-a-house-or-car/
- https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp
- https://finance.yahoo.com/news/does-buying-car-affect-credit-120113618.html
- https://www.bankrate.com/loans/personal-loans/credit-score-fall-after-paying-loan/
- https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
- https://www.quickenloans.com/learn/combination-loan
- https://www.investopedia.com/how-much-car-loan-lowers-credit-score-7486931
- https://www.cbsnews.com/news/the-fastest-ways-to-pay-off-debt/
- https://www.aussie.com.au/insights/articles/home-loans-101-split-rate-home-loans-explained/
- https://www.experian.com/blogs/ask-experian/thinking-about-consolidating-debt-good-idea/
- https://www.creditkarma.com/credit/i/credit-score-drop
- https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-good-credit-score/
- https://www.nj.com/personal-finance/article/how-fast-will-a-car-loan-raise-my-credit-score
- https://www.rocketmortgage.com/learn/when-applying-for-a-mortgage-what-is-considered-debt
- https://www.capitalone.com/cars/learn/managing-your-money-wisely/how-do-car-loans-affect-my-credit-score/1046
- https://www.chase.com/personal/auto/education/buying/buying-a-car-before-buying-a-house
- https://www.fairstone.ca/en/learn/finance-101/consolidate-debt-into-mortgage
- https://money.com/how-to-pay-off-debt/
- https://www.discover.com/credit-cards/card-smarts/paying-multiple-credit-card-debts/
- https://www.marketwatch.com/guides/car-loans/72-month-auto-loan-rates/
- https://www.debt.org/advice/good-vs-bad/
- https://www.rocketmortgage.com/learn/debt-to-income-ratio
- https://www.cnbc.com/select/how-to-pay-off-credit-card-debt-in-one-year/
- https://www.lendingtree.com/auto/combining-auto-loans/
- https://www.citizensbank.com/learning/how-much-debt-is-too-much.aspx
- https://www.ewingandclark.com/what-are-the-pros-and-cons-of-owning-a-second-home/
- https://www.fool.com/the-ascent/credit-cards/how-much-debt-too-much/
- https://www.caranddriver.com/auto-loans/a31521934/does-a-car-loan-build-credit/
- https://www.nerdwallet.com/article/finance/consolidate-debt
- https://www.accunet.com/combining-your-first-and-second-mortgage/
- https://www.creditkarma.com/personal-loans/i/loan-to-build-credit
- https://www.investopedia.com/best-credit-repair-companies-4843898
- https://www.raisin.co.uk/banking/pay-off-debt/
- https://www.bankrate.com/real-estate/income-needed-for-200k-home/
- https://www.equifax.com/personal/education/debt-management/articles/-/learn/prioritize-debt-payments/
- https://www.amfam.com/resources/articles/money-matters/consolidate-debt-with-mortgage-refinance
- https://www.principal.com/individuals/build-your-knowledge/3-ways-pay-your-debt
- https://www.creditstrong.com/raise-your-credit-score-100-points/
- https://www.carsdirect.com/auto-loans/bad-credit-car-loan/will-my-credit-score-go-up-after-i-pay-off-my-car
- https://www.caminofcu.org/can-i-get-a-second-car-loan-if-i-already-have-one/
- https://www.nestapple.com/how-much-house-can-i-afford-on-100k-salary/
- https://www.fnbo.com/insights/2021/mortgage/consolidate-debt-mortgage
- https://www.credible.com/personal-loan/debt-consolidation-loans/how-to-consolidate-bills
- https://www.experian.com/blogs/ask-experian/can-i-borrow-extra-on-mortgage/