What Form of Credit and Debt Should I Pay Off First

Deciding what form of debt you should pay off first can be a stressful endeavor.  Just looking at the debt you’ve accumulated can lead to feeling overwhelmed and discouraged.  This attitude must be combated because it is essential that you get debt paid off in order to take control of your life.  Being debt free will lead to less stress, better purchasing power and could even lead to better health. There are several theories about which debt you should focus on, so make sure you get educated about all the options and start paying off your debt now. There is hope with the right plan of attack.

Types of Debt

People accumulate debt for many different reasons.  Student loans, credit cards, mortgages etc.  Some debts are much more malicious to your life than others and need to be treated as immediate threats.  The trouble is many people have accumulated debt because they have attempted to live beyond their means.  That is they are trying to buy things their income cannot afford them.  Some people have used credit as a way to extend their income, this is one of the worst mistakes you can make because eventually you will need to stop using those cards as income and the interest is going to accumulate at an alarming rate.

Not all debt is created equal, having things like auto loans, house payments and student loans are not as bad as having credit card debt.  Credit card debt is most often associated with a high interest rate form of debt and affects your Fico score more than anything.  It is important for you to inventory the types of debt you have and decide which is most important to remove.

Importance of the Savings Account

You should still be considering paying into your savings account while you pay off your debts.  Although you may not be able to put the full amount into savings you would like, you should be striving to add some.  Having an emergency savings account is essential in making sure you do not run into financial trouble in the future, and thus have to revert to credit as your lifeline.

It is normal for people to have six months of expenses saved in a rainy day fund.  This may seem hard to do considering you have debt looming over your head.  However in the event you lose your job or can’t work for some reason, this savings account will save you from further crippling your credit.

You should also be saving money in some kind of retirement fund.  Again it may seem counterproductive since you have debt you owe now, but it is something you should strive to make happen.  Without proper savings and retirement funds you could end up in more trouble than you are in now.

High interest Debt First

Most experts agree that you should pay off your highest interest rate debt first.  This makes sense because these debts are the ones that will end up costing you the most over time.  Once you have the highest interest debt paid off you move on to the next one.

Many people find this difficult to do because they do not feel like they are gaining ground.  I can understand this frustration but you need to stay the course.  You did not acquire this debt over night and it will not get paid off overnight.

Low Balance Debt First

There is another method of paying off debt that experts suggest.  That is paying off the smallest balance first.  The idea here is that it will keep you motivated to continue paying on your debt and it will actually have a snowball effect.  This method is mostly motivation based since paying the smaller balances with lower interest rates could end up costing more, but if it gets paid than there is really no argument.

If you find that you need motivation to get started on paying off your debts than this method might be the one you want to start with.  If you are more concerned with how much interest is going to cost you than you should surely pay off the highest interest rate debt first.

No matter which method you decide on, you better not take too much time thinking about it.  The longer you wait to start paying off your debt the more interest will accumulate.

Pay the Minimum or More?

Many people pay the minimum amount required from their credit card debt and assume that it is good enough.  The trouble is that they are not chipping away much of their overall balance and they end up paying mostly recurring interest.  This is how banks and credit card companies earn so much money.  They allow you to make minimum payments that get stretched over time causing you to pay huge amounts of interest.

You should be paying the minimum balance plus however much you can afford to pay down on the balance.  This way each month you are paying your interest payment as well as removing the balance of your debt.  This will get your debt paid off faster and save you thousands in interest. Credit card companies now have to include payment timelines if you pay the minimum amount on each statement for this reason.

Last Resorts

If things get so bad that your debt payments are piling up faster than you can earn money, you may need to scrap your savings accounts and retirement funds.  This is never recommended and not a very safe idea.  However if you have interest that is accumulating into the thousands you may have no other choice.  You will be walking a thin line because in the event of an emergency you could end up even worse than you were before.  Cashing out retirement assets or savings accounts should only be used as last resorts.


It makes the most sense to pay off the highest interest debts first.  This will save you the most money in the long run.  If you need motivation to begin paying your debt you can choose the snowball method and pay off smaller balances first to gain such motivation.  Once the smallest balance is paid off, you must then continue onto the next largest balance and so on and so forth.

You should continue to pay into a savings account and a retirement fund but if things get too bad these accounts may become a luxury.  Always pay more than the minimum balance on your debts to ensure you pay less interest and actually make headway on your overall balances. No matter what, the most important thing about paying off debt is that you get started right away and don’t put it off another day.


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