Which Debt Should I Pay Off First?

Pay off higher-interest debt first to save the most money over time. But if that sounds like too big of a challenge, try these other methods.

Updated: September 20, 2023

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Navient is not a debt consulting company. This is for personal finance education only. If you have questions about how to pay off your debt, please consult with a professional debt management company. 

If you have multiple sources of debt, it can take time to figure out which debt you should pay off first. Remember that you are not alone in your debt management efforts. In 2022, the average debt for Americans was $95,067 across all debt types. 

Whether you have debt from a mortgage, student loans, credit cards, or other debt types, there are methods to paying off your debt that can make it easier. The best plan for you is the one you can stick with. However, the first step for everyone is paying off any tax debt or delinquent accounts before trying out these strategies. 

Pay Off Tax Debt First

If you owe any tax debt, you need to pay this debt off first. Tax debt is the result of not paying the tax balance of your federal income taxes by the due date, typically April 15. Going too long without paying could result in high interest, penalties, and fees. Leaving this debt unpaid will be extremely difficult to get out from under. 

Once you pay off your tax debt, you can start paying off your remaining debt. 

Pay Delinquent Accounts First

Another essential step before paying off your remaining debt is to take care of any delinquent accounts. Delinquent accounts are payments or debts that are past due. Having delinquent accounts can have consequences, including late fees and damage to your credit score. It can also make it difficult to secure future credit, such as a mortgage or auto loan. 

Once you’ve handled any delinquent accounts, it’s time to start paying off any remaining debt. 

Pay Off Highest-Interest Debt First (Avalanche Method)

Best for: individuals who can stay motivated

Pros: save money on interest 

Cons: can take a while to feel like you are making progress

The debt avalanche method is the most commonly recommended option for paying off debt. Using this method, you’ll save the most on interest by paying off debts with high-interest rates. 

This method focuses on paying off the debt with the highest interest rate first. To follow the avalanche method, make your minimum monthly payments on all accounts, but dedicate any extra money to the highest-interest debt. As a general tip, when you have additional funds to pay ahead, pay toward the principal instead of the loan balance. 

Once you pay off your highest-interest debt, prioritize paying off the debt with the next highest-interest rate. Continue this process until you are debt free. Like an avalanche, this method starts slowly and then gains momentum. You’ll have more funds for the remaining debts as you pay off the highest-interest debts. Saving money on interest will help you make larger payments on your remaining debt and reduce the total interest you will pay. 

The avalanche method may be suitable if you can stick to making regular payments for years or even decades. It may also work for you if your highest-interest debts are of a relatively low balance. Low balances will make it easier for you to gain momentum using this method. 

While there are benefits to this method, it can be demotivating to get started since the highest-interest debt will also be the most challenging to pay off. It may not work for you if your highest-interest debt also has a high balance. 

Pay Off Smallest Balance Debt First (Snowball Method)

Best for: individuals who want to see progress quickly

Pros: easy to make progress

Cons: will likely cost more than the avalanche method overall

Another method to pay off your debt is the snowball method. This method pays off your lowest balances first, regardless of interest rates. 

This method may be excellent for you if you need help staying motivated or want to feel like you are making progress on your debt quickly. You will likely be able to pay off your first debt in a matter of months or a year. The snowball method keeps your momentum, motivating you to pay down your remaining debt balances. 

Follow the snowball method with these easy steps: 

  1. Make a list of all your debt balances to identify the smallest. For example, let’s consider the following debts: 

    • Credit Card A: $1,000 balance

    • Credit Card B: $7,500 balance

    • Personal Loan: $15,000 balance

  2. Pay the minimum payments on all debts except for your smallest balance. For this example, you would make the minimum payments on Credit Card B and your Personal Loan. 

  3. Put any extra money toward your smallest debt balance. In this example, any extra money would go towards paying off Credit Card A. 

  4. Snowball effect: once you pay off your smallest balance, move on to the next smallest. Using the example, once you pay off Credit Card A, make extra payments toward Credit Card B. 

  5. Repeat as necessary. Continue making extra payments on your next smallest balance until you are debt-free. 

  6. Debt-free: celebrate reaching your financial goals! 

Compared to the avalanche method, this method will cost more overall and take longer. You will also accrue more interest. However, it may be worth it, as paying off your debt will feel more achievable. 

Consolidate Your Debt

Best for: individuals who have multiple high-interest debts

Pros: simplifies payment

Cons: may extend your repayment period; may accumulate more debt 

Consider consolidating your debt to simplify your payments and potentially lower your interest rates. However, you should only consolidate if you are sure you can continue making payments. 

Taking a break from payments can be tempting once your balance is transferred, but you should continue making payments. Delaying will only keep you in debt longer. 

Here are some options to consolidate your debt: 

  1. Debt consolidation loan: One option to consolidate your debt is a personal loan. You can use the personal loan to pay off your debts and then make monthly loan payments instead of several different payments. Consolidating your debt with a personal loan can potentially lower your interest rate, especially if you have high-interest debt. Lowering the interest rate on your debt will reduce your overall payments and the amount of interest paid. Paying off your debts with a personal loan may have other benefits, such as boosting your credit score. Managing a single debt may demonstrate financial responsibility to credit bureaus, possibly improving your creditworthiness. While there are benefits to debt consolidation with a personal loan, consider the drawbacks as well. Lenders may not approve a personal loan if your credit score is low. You also may not receive interest rates lower than your current interest rates. There are also costs associated with personal loans, such as origination fees. Consider all fees to understand the total cost of your personal loan.  

    Apply for a personal loan1 >>

  2. Balance transfer credit card: Another option is to consolidate your debt with a balance transfer credit card. This option is only for existing credit card debt, not other debt types like a mortgage or student loans. A benefit to consolidating your credit card debt with a balance transfer card is that many offer 0% APR for the first 12 months. Introductory offers typically allow you to make payments without paying interest for your first year. Balance transfer cards will also simplify your payments if you have multiple credit card debts. However, consider any balance transfer fees before getting a balance transfer card. Usually, the fee will be a percentage of the amount transferred. Additional costs can impact the cost-effectiveness of consolidating your credit card debt, so factor this into your decision. It may be challenging to qualify for a balance transfer card with a low credit score or a history of late payments. Consolidating your credit card debt with a balance transfer card may be a good option if you can take advantage of the introductory offer and have a good credit score. 

  3. Take out a HELOC: Another option is to take out a home equity line of credit. This option may work for you if you’re a homeowner with equity. Typically, a certain amount of equity is required to qualify for a HELOC, usually around 20%. A HELOC allows you to borrow money against the equity in your home. With A HELOC, you can draw money multiple times up to the maximum HELOC amount. The benefits of consolidating your debt with a HELOC include lower interest rates, simplified payments, and flexibility. Home equity lines of credit can have lower interest rates than credit cards and other unsecured types of debt. They are also flexible and allow you to draw funds as needed. However, the biggest drawback is the risk to your homeownership. A HELOC is secured by your home, meaning you risk foreclosure if you miss payments. Consider your ability to make payments and the potential risk before taking out a HELOC. 

The Best Way to Pay Off Your Debt is to Pick a Plan You’ll Stick With

Remember that the best method to pay off your debt is the one you can commit to. Don’t feel like you have to use a particular approach if you don’t believe it will be sustainable for you in the long run. If you want to consolidate your debt, Navient Marketplace has customized financial solutions that can help you become debt-free. 

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner. All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial. Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. 

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans.

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