Paying off high interest debt first can help you save money on loan fees, but paying the higher balance first can help you see quicker results and stay motivated. The best debt repayment method for you depends on your repayment preferences and budget.
However, there are two repayment methods that can help you focus on repaying the highest interest debt (debt avalanche method) or the higher balance (debt snowball method). Keep reading to learn what debt to pay off first and how to establish good financial habits.
Tackling Your Debt
Americans carry a lot of debt. It is so commonplace now in the states that it has almost become standard in the American way of life. The typical household is paying $1,583 a month on various loans.1
When you are just starting to tackle your credit debt head-on, it can be incredibly intimidating, especially if you feel like you are drowning in debt. That is why it is crucial to approach it in bite-sized pieces rather than allowing yourself to become stuck on the overall total of your debt.
While you must continue making the minimum monthly payments on all your credit cards, quick cash loans, cash advance loans, etc., it is the best strategy to focus on paying down one credit card or loan balance at a time. For example, the average credit card debt in America is $7,951.2 If your balance is as high, you may want to start focusing on that debt.
Higher Interest vs. Higher Balance
There are generally two schools of thought amongst personal finance experts regarding credit debt repayment strategy.
- Paying off your highest interest cards first to save money on costly APRs.
- Paying off your smallest balance first to use momentum to increase motivation.
Each priority has its pros and cons. Paying off your low-balance credit cards first can eliminate entire accounts far quicker, giving you an immediate sense of relief that could have a positive psychological effect. On the other hand, paying interest on your credit cards may help you save an exponential amount of money.
Choosing Your Debt Pay Off Strategy
Determining which debt payoff strategy is best, high interest or low balance first, depends entirely on the borrower’s individual needs and priorities. The names of these two most common pay-off strategies known in the world of personal finance are the debt avalanche method and the debt snowball method.
|Debt Snowball Method
|Debt Avalanche Method
|Paying off debts starting with the smallest balance first.
|Paying off debts starting with the highest interest rate first.
|Provides quick wins and a sense of accomplishment by clearing smaller debts, boosting motivation.
|Requires more discipline and patience, as it may take longer to see debts being fully paid off.
|Less efficient financially in the long term, as it may result in paying more interest overall.
|More efficient financially, as it saves money on interest charges, potentially reducing overall debt cost.
|Pay the minimum on all debts, then use extra funds to pay off the smallest debt. Move to the next smallest.
|Pay the minimum on all debts, then use extra funds to pay off the debt with the highest interest rate.
|Better for individuals who need quick results for motivation and have trouble sticking to long-term plans.
|Better for individuals who are focused on the overall cost and can maintain a disciplined approach.
|Debt Payoff Speed
|Can lead to faster elimination of individual debts, but may extend total time to be debt-free.
|Can lead to a quicker overall debt payoff, although individual debts might take longer to clear.
|Lower priority on interest savings, focusing more on the balance amounts.
|High priority on saving interest, focusing on reducing the costliest debts first.
How To Use The Debt Avalanche Method
One of the most enticing aspects of using the debt avalanche method of debt payoff is the possibility of saving hundreds of dollars in interest. The debt avalanche method also has the potential to decrease the time it takes you to pay off your debt, particularly if you have a considerable amount of debt that would accrue a significant amount of interest.
While it has many advantages, the debt avalanche takes a severe amount of discipline and consistency. Making this strategy quick-moving enough to feel like you are getting somewhere requires a reliable amount of discretionary income every month you can put towards that high-interest balance.
- Prioritize Your Debt — Gather all the various debts you wish to include in your debt repayment method. If you aim to rid yourself of your credit card debt, you can keep your focus there. Using your financial records and credit card statements, determine the APRs for each of your outstanding balances and rearrange the order of your list from highest interest rate to lowest interest rate.
- Keep Making Payments — Figure out how much money you plan to put towards your monthly debt repayment. Continue making only the minimum payments on all other debts except the one at the top of your list with the highest interest rate. Then use whatever money you have leftover to pay down your highest-interest debt. Once that debt has disappeared, those exorbitant interest charges will no longer be a concern.
- Payoff Your Debt — Since one credit card balance has been eliminated, you now have one less minimum monthly payment to make. As you go along, the money you can put towards the primary debt you are tackling will increase more and more so you can pay off debt faster. Keep going until you’ve crossed off every single debt on your list!
How To Use The Debt Snowball Method
The debt snowball method is perfect for borrowers who struggle with motivation and discipline. Starting with lower balance debts, regardless of interest rate, allows for more instant gratification and can offer individuals who are typically tempted to throw in the towel a feeling of success and accomplishment.
However, when not accounting for interest rates, using the snowball method means that you could pay more money overall because of the accruement of interest.
- Organize Your Debt — Compile all the debts you wish to include in your debt repayment plan. Re-order them in a list from the debt with the smallest balance to the debt with the most significant balance without regard for the interest rate. After making your list, the credit card balances will start small and get higher the further down the list you go.
- Prioritize Smaller Balances — Next, determine how much money you plan to allocate every month to pay off your debt. Make the minimum payments for every debt, except the one with the smallest balance. Keep repaying as much as possible on that low-balance debt every month until that debt is completely paid off, and you can cross it off your list for good.
- Continue To Pay Higher Balances — Use the momentum you get after enjoying the success of defeating the first balance to attack the next smallest debt. The amount you can pay on the debt you are paying down will increase with every debt that gets crossed off, creating a snowball effect. Rinse and repeat until it’s all gone!
Which Method Is Best for You?
There is no definitive cut-and-dry answer to say which method is better as it comes down to the individual needs and priorities of the borrower. If you pick a plan based solely on the math of aiming for the least overall cost, then the debt avalanche method will be the obvious choice. However, if you are choosing your method from a more behavioral perspective to make the discipline aspect easier, the snowball method could be the better approach.
When determining which method will be most successful for you, it is essential to look at your strengths and weaknesses when it comes to your personal finances. If you struggle with committing to plans that require a lot of patience, then the snowball method might be right for you. Whereas if you are most concerned with the bottom line and saving as much money as possible, then the avalanche method is likely the best option for you.
Whichever strategy you choose, it is vital to remember that the most important aspects of a successful debt repayment plan are consistency and perseverance!
FAQs About Repaying Outstanding Debt
Credit utilization, or the ratio of your credit card balance to your credit limit, plays a significant role in your credit score. High credit utilization can negatively impact your credit. However, keeping your credit utilization ratio low by paying down credit card debt can positively impact your credit score.
Balance transfer credit cards can be a useful tool for managing high-interest credit card debt. They often offer low or zero interest rates for a promotional period, allowing you to pay down your balance without accruing additional interest.
Debt consolidation with a personal loan involves taking out a new loan to pay off multiple debts, such as credit card balances. This can simplify your payments and potentially lower the interest rate you’re paying, especially if you’re consolidating high-interest debts.
Paying more than the minimum payment on your credit card can significantly reduce the total interest you’ll pay and help you pay off your debt faster. Even small additional payments can make a big difference over time.
When choosing a repayment strategy like the debt snowball method, consider your personal financial situation, motivation style, and how you handle long-term commitments. The debt snowball method is great for quick wins and motivation but may cost more in interest over time.
Prioritize paying off the credit card with the highest interest rate first, as this will save you the most money in the long run. However, if you’re using the debt snowball method, you might start with the smallest balance for a psychological boost.
While balance transfer credit cards can be beneficial, they often come with fees and a high interest rate after the promotional period ends. It’s important to read the terms carefully and have a plan to pay off the balance before the promotional period expires.
Repaying credit card debt responsibly can improve your credit score, which in turn can increase your chances of being approved for a personal loan in the future. Lenders often view a history of timely debt repayment favorably.
A Word From CreditNinja on Paying Off Debt
The answer to the question, “Is it better to pay off high balance or high interest first?” depends on your financial goals. CreditNinja encourages everybody to pay off their debt in any way that works for them, whether that means using a debt repayment method or a debt consolidation loan. Consider which financial plan would work best for your short and long-term goals.
Looking for more financial advice on handling debt and paying off personal loans? Check out the CreditNinja blog Dojo to learn how you can qualify for a 600 loan, whether a background check includes a credit check, and more!