Debt payoff planner: Which debts should I pay off first?

If you’ve ever asked yourself “Which debts should I pay off first?” you at least have the right mindset. Becoming debt-free starts with evaluating the health of your personal finances. If high interest debt is part of the equation, sending the minimum on monthly payments can prolong your indebtedness. With the many variables in place, it is clear that having a plan is essential to finding success.

What Order Should You Pay Off Your Debts In?

It’s one thing to decide to pay off debt for good. But where should one start, especially if there are multiple debts to manage?

“Our experience shows that you will pay your debts down more efficiently and therefore more quickly if you’ve got a plan in place,” says Jeff Schwartz Executive Director, Consolidated Credit Counseling Services of Canada.

Good debt vs. bad debt

Having no debt is the best approach to finances. Examine the debt you currently have. Do you have credit cards, car loans, student loans, a mortgage or a combination of these?

Some debt that you take out is considered “good debt” (i.e. debt that you’ve taken on to increase your net worth, like buying home, home renovations or furthering your education). Although you should plan to pay down all your debt eventually, you are likely better served to get rid of that “bad” debt (i.e. your credit cards) first.

Chances are they are at a higher interest rate than your “good debt” which means that you need to get rid of them first.

“Carrying a balance with high interest rate debt is going to cost you more and more the longer that it accumulates,” says Schwartz.

Focus on a Single Credit Card Bill

If the decision was to eliminate credit card debt, start with one card first. Don’t spread small payments across multiple cards. You are better served to make your minimum payments and then focus your money on one card at a time.

You’ve got two choices: you can either pick the highest interest rate card or you may want to go with the smallest balance one. Getting rid of the highest interest one is good from a financial point of view, but it can be motivating to pay a card down quickly, which is why the small balance approach is good too.

Think about your credit score

If you are trying to boost your credit score, you may want to address cards that are at or near their limits sooner rather than later. A maxed-out card can drastically reduce your credit score. Multiple maxed-out credit cards make getting out of debt more difficult. If there is a way to earn extra money on the side, put it all towards these maxed-out cards to reduce your credit usage.

Coming into extra cash isn’t easy without a second form of income, but strategically using windfalls such as tax returns and gifts can eliminate debt quickly.

How do you decide which approach is best?

To ensure success with paying down your debt, think about your personality and tailor your approach. Is it difficult to stick with something over the long term? Picking a small balance card may be the right answer for you because achieving that goal will take less time. Once you’ve demonstrated to yourself the benefits of staying on course, you may be better able to continue.

If you are extremely motivated and have the willpower to see your plan through in the long term, you may be better to go with the higher interest card. Doing so will pay down your highest interest-bearing debt first, which will translate into more money in your pocket.

Tackling Your Smallest Debt

Handling the smallest debt amount first can help you build confidence and momentum. It’s called the snowball method. Once you pay that debt down, add that same payment amount towards the next smallest debt. Your debt payments will “snowball” into large payments over time.

Dealing with Your Largest debt First

If taking on high amount, high interest is more your style, you are likely to go with the debt avalanche method. While this method takes more time in the beginning, you pay less money in interest. In addition, you gain confidence by seeing your debt reduce substantially from your efforts.

Whatever your approach, your success ultimately hinges on deciding to become debt-free and sticking with your payment plan.

Need help with your debt payoff planner? Call us at 1-888-294-3130 or get started with our free online debt analysis .

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