Is it better to pay smallest debt or highest interest?
Ideally, you want to pay off the debt with the highest interest rate first to save the most money. But if you find that paying off small debts motivates you to continue working toward reducing debt, you may want to pay those off first instead.
Let's cut straight to it: If you've got multiple debts, pay off the smallest debt first. That's right—forget about the interest rate and focus on the smallest debt first. This is called the debt snowball method.
Increasing the down payment will not increase the amount of house for which a lender will qualify you. Using the funds to pay down debt may, because debt is one of the factors used to assess the adequacy of your income, and it also affects your credit score.
Key advantages: Allows you to save money and redirect funds to other financial goals. Key drawbacks: If your largest debt also has the highest interest rate, it could take a while to pay it down. This may discourage some people, increasing the likelihood of giving up on the strategy.
Debt that charges high rates is the most expensive for borrowers to carry. And the longer you leave it unpaid, the quicker the costs grow, especially if it compounds daily.
- The snowball method. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt. ...
- Debt avalanche. Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. ...
- Debt consolidation.
1. Prioritize Debt With the Highest Interest Rate. Prioritizing debt with the highest interest rates can potentially help you save more money on interest. The highest-interest debt you have is likely credit card debt, but other accounts, such as payday loans, can also charge very high interest rates.
The snowball method is a debt-repayment strategy that focuses on paying down the account with the lowest balance first. As you direct your larger payments toward that balance, you continue to make the minimum payments on your other accounts so you don't end up paying late fees, hurting your credit or even defaulting.
Pay off your most expensive loan first.
Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the “avalanche method” of paying down debt.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Should I empty my savings to pay off credit card?
While you can tap into savings to pay your credit card bill—especially if you've got mounting credit card debt and a flush savings account—it's not something you should get into the habit of doing. Using savings to cover a credit card bill will have a negative impact on your savings goals.
Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.
The avalanche method has you focus first on repaying your highest-interest debt until it's completely gone. You then move on to the debt with the next-highest interest rate and so on. Paying more money toward your highest-interest debts may help you save money in interest payments in the long run.
Financial experts agree that you should generally invest your extra cash rather than accelerate paying off low-interest debt, but still some people place immeasurable value on being debt-free or owning a debt-free home.
- Using a balance transfer credit card. ...
- Consolidating debt with a personal loan. ...
- Borrowing money from family or friends. ...
- Paying off high-interest debt first. ...
- Paying off the smallest balance first. ...
- Bottom line.
For many people, it generally makes sense to first pay down any debt with an interest rate of 6% or greater.
Prioritize paying down high-interest debt
If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have and paying off your balance each month if you can.
Paying off the debt on the card with the highest interest rate first is one method to reduce credit card debt. This is called the “debt avalanche method.” While some advocate for paying off your smallest debt first because it seems easier, you may save more on interest over time by chipping away at high-interest debt.
- Not changing your spending habits. If you're struggling to pay off debt, you probably need to change your spending habits. ...
- Closing credit cards after paying them off. ...
- Neglecting your emergency fund. ...
- Getting discouraged. ...
- Not getting help when you need it.
Once your highest interest rate account is paid off, focus on paying off your card with the next highest rate and continue to do so until all of your debts are paid off. This strategy, known as the debt avalanche payment method, could save you significant amounts of time and money in the long run.
Should you pay off small debts first?
The snowball method is about prioritizing small debts first, with the goal of eliminating them as quickly as possible. Once one small balance is eliminated, you can move on to the next-smallest balance until they're all paid off. Compared to other methods, this one may save you less money in the long run.
Most of the credit scores that lenders use in the United States, including most versions of the FICO Score, range from 300 to 850. Therefore, most financial professionals generally accept that 300 is the lowest credit score a consumer can have.
Debt Priority #1 – Taxes
Write it on your forehead and repeat as needed: the IRS always gets its money first. No matter how many people you owe (or how much), delinquent taxes take precedence.
- Make a list of all your credit card debts.
- Make a budget.
- Create a strategy to pay down debt.
- Pay more than your minimum payment whenever possible.
- Set goals and timeline for repayment.
- Consolidate your debt.
- Implement a debt management plan.
It's a good idea to pay off your debts before your credit information is shared each month with the three nationwide consumer reporting agencies — Equifax, TransUnion and Experian. This practice helps keep your credit utilization rate low.
References
- https://www.centralbank.net/learning-center/the-pros-and-cons-of-student-loans-infographic/
- https://www.equifax.com/personal/education/credit-cards/articles/-/learn/how-to-pay-off-credit-card-debt-fast/
- https://www.nerdwallet.com/article/finance/credit-score-needed-to-buy-car
- https://www.kotak.com/en/stories-in-focus/loans/personal-loan/which-loan-should-you-pay-first.html
- https://www.bankrate.com/real-estate/what-credit-score-do-you-need-to-buy-a-house/
- https://www.nerdwallet.com/article/loans/student-loans/student-loan-interest-capitalization
- https://www.usatoday.com/money/blueprint/credit-score/lowest-credit-score/
- https://smartasset.com/student-loans/should-i-make-a-lump-sum-student-loan-payment
- https://www.bankrate.com/personal-finance/credit/when-does-old-debt-fall-off-credit-report/
- https://www.cbsnews.com/news/5-ways-to-pay-off-5000-in-credit-card-debt/
- https://www.experian.com/blogs/ask-experian/why-did-my-credit-score-drop/
- https://studentaid.gov/help-center/answers/article/when-do-i-pay-back-direct-subsidized-or-direct-unsubsidized-loan
- https://www.equifax.com/personal/education/credit/score/articles/-/learn/why-credit-scores-may-drop-after-paying-off-debt/
- https://www.bankrate.com/personal-finance/debt/which-accounts-pay-first/
- https://www.cnbc.com/select/paying-off-too-much-debt/
- https://www.unfcu.org/financial-wellness/50-30-20-rule/
- https://www.nerdwallet.com/article/finance/650-credit-score-good-or-bad
- https://www.banksathi.com/blog/things-to-do-to-raise-your-cedit-score-by-200-points-in-30-days
- https://www.experian.com/blogs/ask-experian/should-i-pay-off-credit-card-or-loan-debt-first/
- https://www.cnbc.com/select/whats-high-interest-debt/
- https://www.cnet.com/personal-finance/credit-cards/advice/heres-why-your-credit-score-dropped-after-paying-off-your-debt/
- https://money.com/consequences-not-paying-student-loans/
- https://themortgagestation.ca/how-lump-sum-payment-affects-your-mortgage/
- https://studentaid.gov/understand-aid/types/loans/federal-vs-private
- https://www.fool.com/research/student-loan-debt-statistics/
- https://www.ofas.uci.edu/paying-for-uci/loans/federal-direct-loans/direct-unsubsidized-loans.php
- https://wallethub.com/answers/cc/how-long-to-pay-off-30000-credit-card-debt-1000423-2140858502/
- https://wallethub.com/answers/cs/how-can-i-raise-my-credit-score-100-points-in-30-days-2140832310/
- https://osfa.uga.edu/resources/policies/federal-direct-loan/cancel-loan/
- https://www.experian.com/blogs/ask-experian/why-credit-scores-could-drop-after-paying-off-credit-cards/
- https://www.experian.com/blogs/ask-experian/should-i-use-savings-to-pay-credit-card-bill/
- https://time.com/personal-finance/article/subsidized-vs-unsubsidized-student-loans/
- https://studentaid.gov/articles/subsidized-vs-unsubsidized-loans/
- https://www.bankrate.com/loans/personal-loans/credit-score-fall-after-paying-loan/
- https://www.cnbc.com/select/should-you-pay-your-credit-card-bill-early/
- https://www.investopedia.com/articles/personal-finance/101014/disadvantages-stafford-loans.asp
- https://www.consumerfinance.gov/ask-cfpb/will-paying-off-my-credit-card-balance-every-month-improve-my-score-en-1293/
- https://www.incharge.org/debt-relief/credit-counseling/success-stories/how-i-paid-off-30000-in-credit-card-debt/
- https://www.furman.edu/blogs/subsidized-vs-unsubsidized-loans/
- https://www.horizonfcu.org/5-ways-to-pay-off-a-loan-early/
- https://educationdata.org/student-loan-debt-statistics
- https://www.cnbc.com/select/how-to-pay-off-credit-card-debt/
- https://studentaid.gov/complete-aid-process/receive-aid
- https://www.creditkarma.com/credit/i/credit-score-drop
- https://www.fool.com/student-loans/2023/09/02/2-reasons-student-loans-are-so-difficult-to-pay-of/
- https://www.creditkarma.com/credit-cards/i/how-to-pay-off-credit-card-debt-fast
- https://fortune.com/recommends/loans/subsidized-vs-unsubsidized-student-loans/
- https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-good-credit-score/
- https://www.debt.org/settlement/how-long-after-debt-settlement-can-i-buy-a-house/
- https://www.incharge.org/debt-relief/credit-counseling/credit-score-and-credit-report/is-it-true-that-paying-a-loan-off-early-doesnt-help-credit-score/
- https://www.discover.com/credit-cards/card-smarts/paying-multiple-credit-card-debts/
- https://www.experian.com/blogs/ask-experian/should-i-take-out-unsubsidized-student-loans/
- https://ownyourfuture.vanguard.com/content/en/learn/financial-planning/how-should-i-prioritize-paying-off-my-debt.html
- https://www.experian.com/blogs/ask-experian/can-paying-off-collections-raise-your-credit-score/
- https://www.debt.org/students/types-of-loans/stafford/
- https://www.equifax.com/personal/education/debt-management/articles/-/learn/prioritize-debt-payments/
- https://www.wellsfargo.com/financial-education/homeownership/loan-amortization-extra-payments/
- https://wallethub.com/personal-loan-calculator
- https://www.usatoday.com/money/blueprint/debt/mistakes-when-climbing-out-of-debt/
- https://www.capitalone.com/learn-grow/money-management/which-debt-should-you-pay-off-first/
- https://studentaid.gov/sites/default/files/repaying-your-loans.pdf
- https://www.capitalone.com/learn-grow/money-management/does-paying-off-a-personal-loan-early-hurt-credit/
- https://studentaid.gov/manage-loans/repayment/plans/standard
- https://www.cnbc.com/2022/07/21/heres-what-you-need-to-know-about-paying-off-your-student-loans.html
- https://www.mirrorreview.com/loans-what-to-choose/
- https://financialaid.umbc.edu/types-of-aid/federal-loans/unsubsidized/
- https://www.consolidatedcredit.org/how-to-get-out-of-debt-if-youre-living-paycheck-to-paycheck/
- https://www.investopedia.com/personal-finance/save-down-payment-or-pay-student-loans/
- https://www.investopedia.com/which-student-loan-should-you-pay-off-first-7371714
- https://www.lendingtree.com/student/how-to-make-student-loan-payment-while-still-in-school/
- https://upsolve.org/learn/subsidized-and-unsubsidized-student-loans/
- https://www.usatoday.com/money/blueprint/student-loans/what-is-an-unsubsidized-loan/
- https://www.bankrate.com/loans/student-loans/pay-off-student-loans-or-invest/
- https://support.myfico.com/hc/en-us/articles/4407687450647-I-recently-paid-off-my-car-loan-and-my-FICO-Score-dropped-Is-that-possible
- https://www.experian.com/blogs/ask-experian/what-debts-should-i-pay-off-first/
- https://www.lendingclub.com/resource-center/personal-loan/the-pros-and-cons-of-paying-off-a-personal-loan-early
- https://www.experian.com/blogs/ask-experian/should-i-pay-off-student-loan-in-lump-sum/
- https://studentaid.gov/manage-loans/repayment
- https://www.towerloan.com/blog/do-student-loans-affect-credit-score/
- https://www.lendingtree.com/student/subsidized-vs-unsubsidized-student-loans/
- https://www.cnn.com/cnn-underscored/money/types-of-student-loans
- https://www.fidelity.com/learning-center/personal-finance/pay-down-debt-vs-invest
- https://www.equifax.com/personal/education/credit-cards/articles/-/learn/should-i-pay-off-my-credit-card-in-full-each-month/
- https://www.principal.com/individuals/build-your-knowledge/3-ways-pay-your-debt
- https://cred.club/check-your-credit-score/articles/how-fast-does-a-credit-score-go-up-after-paying-off-debt
- https://www.fbfs.com/learning-center/which-student-loans-should-i-pay-off-first
- https://www.cbsnews.com/news/the-fastest-ways-to-pay-off-debt/
- https://studentaid.gov/understand-aid/types/loans/interest-rates
- https://www.gobankingrates.com/money/wealth/pay-off-debt-vs-invest-how-millionaires-prioritize/
- https://www.bankrate.com/loans/student-loans/which-student-loan-pay-off-first/
- https://www.easyknock.com/blog/does-paying-off-student-loans-help-credit-score
- https://blog.turbotax.intuit.com/tax-tips/why-you-should-pay-the-irs-first-and-who-to-pay-next-2433/
- https://www.merriam-webster.com/dictionary/unsubsidized
- https://www.moneylion.com/learn/why-is-my-credit-score-so-low-if-i-have-no-debt/
- https://www.lendingtree.com/student/pay-off-student-loans-early/
- https://www.mortgageretirementprofessor.com/A%20-%20Qualifying/pay_down_debt_or_pay_more_down.htm
- https://studentaid.psu.edu/types-of-aid/loans/federal-direct-loans/federal-direct-subsidized-and-unsubsidized-loans/repayment
- https://www.unfcu.org/financial-wellness/protect-your-money-during-high-inflation/
- https://studentaffairs.fresnostate.edu/financialaid/documents/forms/DL_SS_Consumer_Information.pdf
- https://www.cnbc.com/select/common-credit-card-payoff-strategies/
- https://www.investopedia.com/800-plus-credit-score-how-to-make-the-most-of-it-4685008
- https://time.com/personal-finance/article/15-3-credit-card-hack/
- https://www.sfa.ufl.edu/types-of-aid/loans/subsidized-and-unsubsidized-loans/
- https://www.thestreet.com/personal-finance/what-is-the-highest-credit-score-14820101
- https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/
- https://www.wellsfargo.com/goals-credit/smarter-credit/manage-your-debt/pay-off-debt-faster/
- https://www.cnbc.com/select/best-time-to-pay-your-credit-card-bill/
- https://www.bankrate.com/loans/student-loans/never-pay-student-loans/
- https://money.com/how-to-pay-off-debt/
- https://wallethub.com/student-loan-calculator
- https://www.nerdwallet.com/article/finance/credit-score-drop-pay-debt
- https://www.sacbee.com/news/california/article278038523.html
- https://www.equifax.com/personal/education/debt-management/articles/-/learn/debt-negotiation-with-lenders/
- https://www.ramseysolutions.com/debt/what-debt-do-i-pay-off-first
- https://joinjuno.com/financial-literacy/student-loans/when-to-decline-a-student-loan-5-tips
- https://www.bankrate.com/loans/student-loans/pay-more-than-minimum-payment/