Which Debt Should You Pay Off First?

A post-it with the words 'manage your debt' written on it instructing how to pay off your debt

There is rare agreement among financial experts that consumers facing multiple credit card balances should focus their extra effort—and funds—on one debt at a time, and after that debt is paid off, put any extra funds toward the next debt on the list, and so on.

Which Plan to Use

While we all think this is the wisest plan for paying down multiple balances, there is much debate about how the debts should be prioritized:

  • Debt Snowball: The popular debt snowball method says you should pay the smallest balances first. Once the smallest debt is wiped out, put any extra funds to the next smallest, and so on. The last debt to be repaid will be the one with the highest balance. This method creates momentum and eliminates debts more quickly up front as the first few small debts are paid off.
    • Debt Snowflake: This is a variant of the snowball, where you make multiple payments every month. So every debt gets the minimum payment, then you make extra small payments every week to the one with the smallest balance. It has the same effect as the snowball, but you’re spreading out the payments for budgetary reasons.
  • Debt Avalanche: Also called debt stacking, with this method you pay high interest rates first. This saves you the most money by getting rid of the most expensive debts, with the last debt being the one with the lowest interest rate
  • Highest Balance First: We could coin a clever term for this, like “Debt Iceberg”, but the truth is no one recommends paying toward your highest balance first. The debate centers on whether one should tackle balances in order of lowest to highest, or interest rates from highest to lowest. We could see a potential scenario where one might tackle balances from highest to lowest without regard to interest rates—that is, if one debt is much higher than all the others and you’re making no progress every month. In that scenario, one might put extra money toward the high balance to bring it down to a manageable level. Even if you start with this in mind, we wouldn’t suggest you stick with these priorities. You’ll want to choose another method to finish paying off all of the debts.
  • DMP: Under a Debt Management Plan, every creditor is treated equally, without putting extra toward any one debt. The reason for this is the DMP includes a negotiation with all of the creditors, whereby you are granted reduced payments and lower interest rates. Part of that negotiation is that all creditors will be treated equally. It would be impossible to get them to come on board and grant concessions if their debts were going to be prioritized lower than others on the list.

So which method is the best? If you’re a good candidate for a DMP (and not everyone is), a certified credit counselor will work out the payment plan with you. If you’re tackling your debts on your own (and we encourage that before signing up for a DMP) then you have to weigh the advantages of the Snowball vs. the Avalanche. The bottom line is, the Avalanche method saves you money, while the Snowball method feels better, as you score “wins” up front when you pay off smaller debts first.

So the real answer depends on you. Are you someone who can stick with a budget and do what’s needed to pay off high-interest debts first? Or do you need the extra encouragement that comes with tackling the most manageable balances up front?

If you’re having trouble answering that question for yourself, call us today. We have certified counselors who will help you understand your situation and create a budget, with no need to sign up for a debt management plan. Counseling is always free and confidential!

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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