How to Determine Which Debt to Pay Down
Understanding how to pay off debt can save borrowers hundreds if not thousands of dollars. How much you save depends on how much you owe and how successful you are in following a good debt payoff pace. Determining which debt to pay down first is a common question. Discovering how to evaluate your debts and figure out who to pay and when to pay them is the first step in getting yourself out of debt.
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Instructions
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Collect the most recent statement from all of the debts you owe. Focus on credit cards, personal loans, car loans and student loans. Mortgages are usually too high to consider paying off unless you have no other debt to consider.
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Make a list of the amount owed on each debt, the interest rate you are paying and the minimum amount due every month.
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Order your list according to the interest rate you are paying. List the debt with the highest interest rate at the top of your list. Follow this with the debt that has the next highest interest rate. Continue until you have finished listing all of your debts according to the interest rate you are being charged.
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Pay the debt at the top of your list with as much money as you can afford until it is paid off. This is the debt you should pay down first because it is the debt you are losing the most money on. The higher the interest rate, the less you pay on the balance of what you owe.
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Tips & Warnings
Make more than the minimum payment on the debt you want to pay down first. This will pay off the debt faster and reduce the amount of money you are paying to interest on a monthly basis. As the amount of your interest payments go down, the amount of money that goes to pay off your balance increases. Pay the minimum balance on all of your other debts while you are working to pay down the debt with the highest interest rate.
You may be tempted to pay off debts with lower interest rates first. This may give you a sense of accomplishment, which can be good, but it does not make financial sense. The debts with the highest interest rates are taking more of your hard-earned dollars. Interest payments do not help pay down debt. They only function as the fee you pay to have the privilege of borrowing money.
