What debt should be paid off first?

How to pay off debt

When figuring out how to pay off debt, start by addressing any overdue balances. Once you're caught up, you can choose a payoff strategy based on interest rates or balance size.

Start with delinquent and urgent debts

Delinquent debts should be a top priority when paying off debt. Overdue debts can negatively affect your credit score and lead to increased charges through additional fees and penalties. You could also risk forfeiture of your assets such as your home or car if you fall behind on your mortgage or auto loan.

If you have any debts currently in arrears, you should pay those debts first before choosing a debt repayment strategy such as the debt snowball or avalanche method.

Once you’re current on overdue debts, you can focus on paying down what’s left using one of two common strategies:

Pick a debt payoff method

There are two common debt payoff strategies you can use: the snowball and the avalanche method.

Debt snowball method

The debt snowball method is when you pay off your smallest debts first, working up to your biggest. It sorts debts by total balance and targets the smallest ones first. This allows you to begin paying off debts faster.

In the meantime, you still make all the minimum payments for your debts to ensure you don’t fall behind.

This method doesn't save the most on interest, but it can keep you motivated with quicker wins. It might also help your credit score go up faster, especially if one of your smaller debts is a credit card. Paying off a credit card, even a small one, can boost your score more than paying off a loan because it lowers the amount of available credit you're using.

Debt snowball example

Total debts:

• Student loan debt: $35,000 at an 8% interest rate
• Credit card debt: $5,000 at a 22% interest rate
• Auto loan debt: $20,000 at a 3% interest rate

Under the debt snowball method, you pay off your credit card debt first, followed by your auto loan debt.

Debt avalanche method

For many, the interest rate is the driving factor when determining what debt should be paid off first. That is where the debt avalanche method comes in.

This is the opposite of the debt snowball method. Here, you focus on the largest debts first, paying them off before working your way down to your smallest ones. Many borrowers prefer this method since tackling the biggest balances first means paying far less interest.

As with the debt snowball method, you should still make the minimum payments on all debts while employing the debt avalanche strategy.

Debt avalanche example

Total debts:

• Student loan debt: $35,000 at an 8% interest rate
• Credit card debt: $5,000 at a 22% interest rate
• Auto loan debt: $20,000 at a 3% interest rate

Under the debt avalanche method, you pay off your student loan debt first, followed by your auto loan debt.

Balancing debt payoff with credit improvement

There are ways to pay off debt while also improving your credit score, but it helps to understand how different types of debt affect your score.

Your credit score is calculated by looking at how much debt you have, what kind it is and how long you’ve had it. For example, maxed-out credit cards hurt your score more than student loans with regular payments. To raise your score while paying down debt, try these tips:

• Check your credit score. Get a free copy of your credit report so you can review your current score.
• Total your debts. Take stock of your financial situation by making a list of all your debts, including the total balance, minimum monthly payment amount and interest rate.
• Make a budget. Make another list that includes all your monthly income and expenses. Consider using a budgeting app to help, like YNAB or Empower. This will help keep your spending on track so you do not spend more than you have and risk further debt.
• Make timely payments. Be sure to pay each of your bills on time and in full each month. Setting up payment reminders or autopay can help you stay on track to avoid missing any payment deadlines.
• Make extra payments. If you experience a windfall of cash, whether from a raise at work, inheritance or real estate sale, use those funds to make extra payments on your debt. This will help you reduce the total amount of interest you pay.
• Keep your accounts open but with a low balance. Credit utilization accounts for 30% of your FICO score and credit history for 15%, so keeping accounts open can sometimes be helpful. For example, it’s a good idea to keep your credit card account open, but you should close out that student loan as soon as possible.
• Lower your bills. Look for ways to lower your expenses, whether it’s cooking at home more or cutting some of your streaming subscriptions.
• Establish an emergency fund. If you can, set an extra bit aside each month to build an emergency fund. If you fall on hard times in the future, it will be there to help you so you can still meet your obligations.

You’ll want to follow these tips in conjunction with a debt repayment strategy, such as the debt snowball or avalanche method.

» COMPARE: Ways to pay off debt

Debt payoff options

Here are some debt payoff options that can help you take control and rebuild your credit over time:

Debt negotiation

Before you pay off your debt, try to negotiate your debt directly with your creditor. You may be able to work together to find a repayment solution that works for you. If you’re experiencing financial hardships, let them know. They may be willing to rework your payments, lower your interest rate or even write off some of your overall balance.

“Debt negotiation becomes viable when clients are 90+ days delinquent and facing potential charge-offs,” said Adam Meyers, a portfolio manager and former JPMorgan Chase adviser currently developing a debt management platform called Debt Crusher.

“While it damages credit short-term, settling debts for 40 to 60 cents on the dollar can provide necessary relief,” Meyers told us. “However, clients must understand the tax implications of forgiven debt.” For example, the amount that’s forgiven might be treated as taxable income by the IRS.

Debt consolidation

Debt consolidation combines multiple debts into a single debt, usually through a debt consolidation loan or a credit card. Consolidation makes repayment significantly easier since there’s only one payment and one creditor. You might also save money if the new loan or credit card has a lower interest rate than your current debts.

“Debt consolidation works best for clients with good credit (680+) carrying multiple high-interest debts,” said Meyers. “I've seen clients reduce their effective rates from 22% to 8% through personal loans, freeing up hundreds monthly for accelerated payoff.”

» COMPARE: Best Debt Consolidation Loan Companies

Balance transfer credit card

A balance transfer credit card is one way to pay off existing debt when you have multiple credit cards. “Balance transfer credit cards can be powerful tools for disciplined borrowers,” said Meyers. “The 0% introductory periods provide breathing room, but only if clients commit to aggressive payoff schedules.”

If you have good credit, you may be able to benefit from an introductory 0% annual percentage rate. This gives you an opportunity to pay off debt without interest for a limited period.

However, be sure to check the fee schedule before committing to a card. Balance transfer cards can carry hefty transfer fees that can add up quickly. “I warn clients that the average person increases their debt by 20% within two years of a balance transfer due to available credit temptation,” Meyers told us.

Debt management plan

Debt management plans are usually offered by credit counseling agencies. The agency works with your creditors to lower your interest rates or adjust terms. You make one monthly payment to the agency, and it pays your creditors. Just be sure to review the fees before enrolling.

“Debt management plans through nonprofit credit counseling agencies work well for clients struggling with minimum payments but who want to avoid credit score damage,” Meyers said. “These plans typically reduce interest rates to 6% to 10% and provide structured payoff timelines.”

» COMPARE: Best Credit Counseling Services

Bankruptcy

Bankruptcy is a last resort if you’re overwhelmed with debt and can’t make a payment.

There are a few types of bankruptcy, but two common forms are Chapter 7 and Chapter 13.

• Chapter 7 bankruptcy allows you to liquidate assets to pay off unsecured debt like credit card and medical debt. The remaining debt may be discharged, giving you a clean slate moving forward.
• Chapter 13 bankruptcy assigns you a trustee of the court and puts you on a repayment plan lasting three or five years, depending on your income. You don’t have to liquidate any assets, but you’ll probably have to pay most or all of your debt.

» FIND OUT: Should I file for bankruptcy?

It’s important to note that bankruptcy stays on your credit report for a long time — sometimes up to 10 years. This can hinder your ability to qualify for a good interest rate on future loans and credit cards.

“Bankruptcy remains the nuclear option,” said Meyers, “but Chapter 7 can provide essential fresh starts for clients overwhelmed by medical debt or major life changes. Chapter 13 works for higher-income clients who need court protection while maintaining payment plans.”

Before filing for bankruptcy, consult a financial advisor or bankruptcy lawyer who can review your options and determine the best strategy moving forward.