Debt Reduction: Which debts do you pay off first?

If you’ve gotten yourself into some debt problems and are trying to drag yourself out, how do you prioritize your debts in terms of repayment? This can be the toughest decision you face – it will make a huge difference in how fast you’re able to pay it off.

There are a couple of key considerations that you should factor into your decision: interest rates and the amount of the debt. Each of these should play a role in your decision. For interest rates, the decision is easy: generally, you should try to pay off the highest interest rate debts first. This will usually be credit cards, then house debt, then student loans and other special kinds of debt. But there is one other factor to counterbalance against this. You may want to pay off a smaller debt first, simply because you will completely eliminate the monthly payment. That can be good if you’re struggling to get buy month to month – because you won’t have to make those monthly payments anymore, you’ll have a little more leeway in case you get into an emergency that requires some cash. That’s an important thing to think about – if you’re frequently finding yourself having to borrow more money to get by, you need to eliminate one or two of your credit cards. Paying one half-way down will speed up the time it will take to pay it off, but you’ll still be making payments for a year or two. Getting rid of it entirely means that you’ll have more to apply to other debts each month, as well as a cushion to keep yourself from borrowing more. At the same time, if you’re paying an extremely high interest rate on one of your debts, then it needs to go – the expense is not worth keeping it up.