Which Debt To Pay Off First: How To Choose the Best Payoff Order

The best debt to pay off first is usually one with the highest interest rate. The exceptions to that rule are overdue bills and high-risk debts, such as a loan with collateral you’ll lose if you default. 

Whatever your debt situation, the best strategy for paying it off includes making minimum payments on all your accounts, prioritizing the debts you need to pay off first and deciding how to make the extra payments.

Key Takeaways

• Highest interest first usually wins: When deciding which debt to pay off first, target the highest-rate balance to cut total interest — but only after minimum payments are covered.

• Overdue and high-risk debts come first: Bring past-due accounts current before anything else to avoid collections, repossession of collateral or legal action.

• Two proven methods, different payoffs: The avalanche (highest rate first) saves the most money; the snowball (smallest balance first) delivers quick wins that help you stay motivated.

• Always pay every minimum: Make minimum payments on all accounts, then send extra money to one priority debt at a time for faster, trackable progress.

• Save a small buffer first: Many experts suggest setting aside about $1,000 in starter savings before making extra debt payments, so a surprise expense doesn't push you back into debt.

• Watch 0% promos and verify old debts: Pay down 0% balances before the promo ends, and confirm balances on medical bills and collections before paying.

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Which Debt Should You Pay Off First? Start With This Order

You should always make the minimum payments on each debt first, then follow this debt payoff order:  

1. Bring overdue accounts current to avoid collections, credit damage, repossession of collateral and possible legal action.

2. Pay off high-interest debt first to save money on interest.

3. Pay down your lowest balance first to build momentum.

4. Review your lower-interest debts after overdue and high-interest debts are under control.

You’ll note that in this context, “first” refers to which debt to eliminate first to meet a particular financial goal, but only after you've made your minimum payments and gotten caught up on overdue accounts. Pay highest-interest debt first if your first priority is minimizing interest payments. Pay the lowest balance first for a quick win.

Here's a closer look at the types of debt you might be dealing with and how to prioritize debt payments.

Debt Avalanche vs. Debt Snowball: Which Payoff Method Works Best?

The debt avalanche and debt snowball are equally effective, but for different people's circumstances. The debt avalanche works best for people who prioritize saving money on interest. The debt snowball is best for people motivated by quick results. Base your decision on your preferences and your budget.

Pay High-Interest Debt First To Save More Money

The debt avalanche prioritizes high-interest debt, such as credit cards and high-rate personal loans, to save money on interest. Here's how it works:

1. Make minimum payments on all your accounts.

2. Pay extra toward the debt with the highest interest rate.

3. Once that debt is paid off, put the extra money toward the debt with the next-highest rate. Continue this way until you're debt-free.

This method might feel slower if your highest-rate debts have large balances. But each time you pay one debt off, you have both the minimum payment and your extra payment to put toward the next debt, so payoffs go faster as you progress.

Pay the Smallest Debt First for Quick Wins

The debt snowball method produces quick results because you pay off the smallest debt first.  That can motivate you to continue chipping away at your balances. As with the debt avalanche, each debt you pay off gives you progressively more money to put toward paying off the next one. 

Here's how to do it:

1. Make minimum payments on all your accounts.

2. Pay extra toward the debt with the lowest balance.

3. Once that debt is paid off, put that money toward the next-lowest balance. Keep going until your debt is fully paid.

Prioritize Past-Due or High-Risk Debt First

Past-due accounts should take first priority, especially if the debts are high-risk. Risky debts include secured loans, tax debt, accounts in collections and those that could result in lawsuits. Once you’ve stopped the bleeding, so to speak, you can focus on other debt.

How To Decide Which Debt Gets Extra Payments

The following steps can help you figure out the best debt to pay off first.

List Your Debts, Interest Rates and Minimum Payments

First, figure out where you stand with your debt. List the following for each account:

• Current balance

• Interest rate/annual percentage rate (APR)

• Payment due date

• Account status (current or past due)

• Whether debt is secured or unsecured

• Promotional APR, if any, and date it expires

Sort Your Debts by Risk, Cost and Balance

Next, sort your debts according to risk level, APR and account balance. As you review your list, ask yourself these questions:

• Is any debt past due?

• Could any debt lead to repossession, default, collections or a lawsuit?

A "yes" answer to either question means you have high-risk debt. Consider paying it off first.

Now ask yourself:

• Which debt has the highest interest rate?

• Which balance could be paid off quickly?

These are the best accounts to start with for the debt avalanche (highest-interest debt) or debt snowball (lowest-balance debt) method.

Finally, look at any 0% APR card that’s about to expire. Depending on the balance and the regular APR, you might want to pay this first.

Focus Extra Payments on One Debt at a Time

Start paying extra on one account at a time. Although you can spread the extra money across two or more accounts, progress might feel slower and harder to track.

The following example explains how you might approach the following debts:

• Credit cards: $3,000 at 24% APR

• Personal loan: $7,000 at 12% APR

• Medical bill: $900 interest-free

• Auto loan: $10,000 at 6% APR

The avalanche method would tackle the credit card debt first. The snowball method would start with the medical bill. But the auto loan is secured by your car, so you might pay that first if it’s overdue, or if reducing risk is your top priority.

When Paying Off Debt First May Not Be the Best Move

Sometimes it makes sense to consider all your options before putting every available dollar into debt repayment. 

• Building an emergency fund: Emergency savings can help you avoid using debt to cover unexpected expenses. Personal finance expert Dave Ramsey suggests saving up $1,000 before you start making extra debt payments. 

• Other payoff methods: If you don’t have room in your budget for extra debt payments, explore other ways to make the payments more manageable, such as with a debt consolidation loan, balance transfers to a 0% APR credit card or debt counseling. If you’re struggling with medical debt, ask about a hardship repayment plan. 

• Verifying old debts, medical debts and collections: Creditors and debt collectors can make mistakes. Confirm your charges, current balances and repayment terms before sending money. And always get settlement offers in writing so that you have proof of the final balance due, how you’ll pay it and what happens to the forgiven debt.

Which Debt Should You Pay Off First? Final Take

High-interest debt such as credit card accounts is usually the best place to start making extra payments toward your debt. But urgent debts, including past-due accounts and those secured by your car or other collateral, should come first if leaving them until later might cause negative consequences. 

You can start getting a handle on your debt today. List them so you know exactly where you stand. Pay the minimums due each month, and consistently pay extra toward your highest-priority account.

FAQs

Should I pay off credit cards or loans first?

It’s usually best to pay off credit cards first if their interest rates are higher. But if you're behind in loan payments, or you’re struggling with a loan secured by your car or other property, focus on the loan instead.

Should I save money or pay off debt first?

First put aside emergency savings while continuing to make your minimum debt payments. Once you’ve saved $1,000, put your extra money toward debt repayment. Then work toward saving three to six months’ worth of expenses after your debt is paid off.

Should I pay off collections or current debt first?

Prioritize paying off collections, especially if there's a big risk to your credit or you're facing legal proceedings. It's best to verify that debt first. Collections accounts are high-risk debts that can have serious consequences.

Key Terms

• Debt avalanche: A payoff strategy that targets the debt with the highest interest rate first while paying minimums on the rest, minimizing total interest paid.

• Debt snowball: A payoff strategy that targets the smallest balance first to create quick wins and build momentum, regardless of interest rate.

• Secured debt: A loan backed by collateral, such as an auto loan or mortgage, where the lender can repossess the asset if you default.

• Unsecured debt: Debt not tied to collateral, such as most credit cards, personal loans and medical bills.

• Annual percentage rate (APR): The yearly cost of borrowing, including interest and certain fees, used to compare the true cost of debts.

• Minimum payment: The smallest amount you must pay each billing cycle to keep an account in good standing and avoid late fees or credit damage.

• Collections: An account a creditor has handed to a debt collector after nonpayment, which can damage your credit and lead to further action.

• 0% promotional APR: A temporary no-interest period on a card or balance transfer. The regular APR applies once the promo ends.

Sources

• Consumer Financial Protection Bureau: Managing Your Debt.

• Federal Trade Commission: Credit, Loans and Debt.

• Ramsey Solutions: Dave Ramsey's 7 Baby Steps.

• AnnualCreditReport.com: Free Credit Reports.

Summary generated by AI, verified by MoneyLion editors