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Wonder Which Debt to Pay Off First? Your Questions Answered

Debt payoff can be overwhelming. Figuring out which debt to pay off first is a great place to start.

Chris Scott

Contributing Writer at Tally

October 1, 2021

For many of us, having debt is an open secret.

The personal debt for the average American is $92,727, according to Experian. If you carry any sort of debt, you may be wondering how to quickly and efficiently pay it off.

In this article, we'll provide some pointers to help you get started on your debt payoff journey. Specifically, we'll answer how to determine which debt to pay off first. We also provide tips for paying off debt faster. By the end of this article, you should have a good idea of the steps you need to take to reach financial freedom and become debt-free. 

Determining the order for debt repayment 

​When it comes to debt repayment, you have a few different options available. However, two primary strategies stand out: 

  • Debt avalanche method

  • Debt snowball method 

Both have their advantages, and choosing the right one may be a matter of personal finances and preferences. 

Before looking more closely at each strategy, two similarities between them are worth emphasizing. 

First, both strategies call for you to make minimum monthly payments on all your debt. Missing your minimum monthly payments will harm your credit score. It can also trigger penalty fees or interest rates. No matter which debt management strategy you choose, making minimum payments on your debts is a must. 

Second, it's important that you don’t take on new debt while paying off your existing debt. Otherwise, you'll just prolong the time it’ll take you to pay off debt. Consider setting a budget and curbing your spending to ensure you're not borrowing more funds. 

Let's take a closer look at what these two debt payoff strategies have to offer. 

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Debt avalanche method

With the debt avalanche method, you'll make the minimum payments on all of your debts. Then, if you have extra money, you'll put it into the debt with the highest interest rate. 

The thinking behind this method is that getting rid of your high-interest debt first will save you money. Your debts with lower interest rates won't accumulate as much interest and won't cost you as much in the long run. 

Once you pay off the debt with the highest interest rate, you move to the debt with the next-highest interest rate. You’ll repeat the cycle — making minimum payments on all other debts and putting as much as you can toward the debt with the highest rate — until all your debts are paid off. 

In paying off the debts with the highest interest rates, you'll end up saving money over time. Though it depends on your financial situation, there's a strong chance that credit card debt is the type of debt with the highest interest rate. Credit card annual percentage rates (APR) can extend upward of 25%. 

Note that this method does not have anything to do with your total balances. For instance, you could owe $5,000 on a credit card with a 24% APR and $35,000 on a car loan with a 4% interest rate. Since the debt avalanche method calls for prioritizing the debt with the highest interest rate, regardless of the balance, you would pay off the credit card debt first. 

Debt snowball method 

The debt snowball method calls for you to pay off your debt with the smallest balance first, regardless of your interest rate. By paying off your smallest debts first, you generate quick wins and build momentum. Once you pay off a debt in full, you focus on paying off the next debt. 

Let's say, for instance, that you have three debts. You have a student loan with a balance of $4,000, high-interest credit card debt with $20,000, and an auto loan with a balance of $12,000. The interest rates don't matter under the debt snowball method. You'll make minimum payments on all three and then put any leftover funds toward paying off your student loan since this has the lowest balance. 

Once you pay off your student loan, work toward paying off your auto loan while making minimum payments on your credit card. If you're someone who struggles to pay off debt and needs a bit of momentum and push to help you work toward your financial goals, then the debt snowball method could be for you. 

Pick which debt to pay off first

Which debt to pay off first: A couple meets with a financial advisor

Now that you better understand the two debt payoff strategies, it's time to figure out which debt to pay off first. 

If you have elected for the debt avalanche method, start listing your current debts by their interest rates. The debt with the highest interest rate should be at the top of the list. The debt with the lowest interest rate should be last on the list. 

Again, it depends on your personal financial situation, but there's a strong chance your credit card debt will end up first on the list. If you're not sure of your interest rate, you can find it by looking at your monthly statement or asking your lender. 

If you have elected for the debt snowball method, list your debts in order of the total balance, from smallest to largest. The debt with the smallest balance is the one you will pay off first. There is no telling which one of your debts will have the smallest balance, so this will vary from person to person. Again, your monthly statements would be able to provide you with your total balances. 

Three tips to help you pay off debt faster

Choosing a debt management strategy is the first step in paying off your balances. But even then, there are some things that you can do to help yourself. The tips we've listed below can potentially further enhance your debt payoff. 

Refinance your debt 

The higher your interest rate, the more the borrower will repay. Lowering your interest rate will reduce how much you have to repay, ultimately making it easier for you to get out of debt. There are two primary options to refinance your debt: balance transfer cards and debt consolidation loans

Negotiate with your lender

Another option you have for lowering your interest rate is to negotiate directly with your lender. Sometimes a phone call to customer service can go a long way, especially if you have established a good credit history. Even if you are only a few months away from paying off your debt, negotiating could help you save a bit of money. 

Use tools and apps

Another option to help pay off debt is a credit card payoff app like Tally†. Tally automatically pays down your debt efficiently, using the principles of the debt avalanche method. The app also makes minimum payments on your other credit card debts so that your lender doesn’t charge you late fees. 

Even if you don't use the payoff portion of Tally's app, you can still use the app to help manage your due dates and minimum payments. If you currently have numerous debts that you're trying to handle, Tally can potentially keep things more manageable. 

Start paying off debt today 

A happy couple looks at each other while sitting on their couch

Whether you have debts from personal loans or credit cards, it's important to start repayment. The longer you leave your balances outstanding, the more difficult it will be to pay them off. If wondering which debt to pay off first was serving as a barrier, now you’ll have a clearer path of where to begin.

There are two primary strategies for paying off debt: the debt avalanche method and the debt snowball method. Both can be effective, and so it all comes down to your personal preferences. Any option that gets you paying off debt is an effective one. 

If you use the debt avalanche method, you'll want to pay off the debt with the highest interest rate. If you use the debt snowball method, you'll want to pay off the debt with the smallest balance. Exploring tools like balance transfer cards and Tally could help you better manage your money and interest rates, helping you on your journey of becoming debt-free. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.