Which Debt Should You Focus on Paying First?

If your debt is piling up, you need a debt reduction strategy now. But where do you start? Which debt should you focus on paying first?

Worrying about how you will pay the bills can rob you of sleep, impacting your physical and mental health. When you cannot meet your debt obligations, your credit score suffers. The lower your credit score, the less empowered you will be to secure financing or to negotiate for the best terms.

Debt reduction must be at the top of your bucket list.

The challenge is how to begin. If you are carrying debt on several credit cards, as well as loans, it can seem impossible to find the starting point. Fortunately, there are a few ways to decide which debt should you focus on paying first.

Get Organized

The first step is to get organized. Make a list of all your outstanding debt. How much do you owe? What are the monthly payments? What is the interest rate? Now you will have an accurate picture of your total debt.

Get Rid of the Highest Interest Rate First

If you have credit cards, for example, with higher than average APRs, you will find that you are making no progress toward diminishing the balance owed on your card. Therefore, prioritizing on your higher-interest debt first is one way to get out of debt sooner.

While you are focused on your highest interest rate debt, you should continue to make the minimum payments on your other accounts. Once paid off, you move to the next highest interest debt on the list.

The Snowball Strategy

Dave Ramsey, a well-known financial advisor offers a different approach. When deciding which debt should you focus on paying first, he suggests that you begin with the smallest accounts.

Like the approach above, you continue to make minimum payments on all your other bills, but you put the maximum amount of money you can squeeze out of your budget toward the smallest debt account until you have paid it off. Once you have brought that balance to zero, you turn to the next account on the list.

This approach will not help you reduce the high interest rates you are carrying, but it does give you the incentive to keep going. As you pay off each debt, you can check it off the list. You will gain the confidence you need to stay on track until you have managed to reduce or eliminate all your debt.

Pay Off Highest Minimum Payment Bills First

There is another way to figure out which debt should you focus on paying first, and this is to prioritize your accounts according to those with the highest minimum payment requirements. With this strategy, you get rid of those high minimum payments that impact your monthly cash flow.

You may have credit card accounts with high interest rates, but your minimum payment is only $100. Chances are you can make that minimum and you will keep your account in good standing. But a $500 minimum payment each month, for example, on your car loan, could be more challenging. Therefore, get rid of that debt first and work your way down to the more doable minimum payment bills.

As you pay off one account, use that money to increase what you pay to the next highest minimum payment debt until you are debt-free.

Reducing Expenses

Whichever strategy you choose, reducing your expenses is key to your success. Before beginning, you should review your budget, make an accounting of monthly and daily expenses, and cut out all the waste. This will give you more money to put toward your chosen debt reduction strategy.

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