Prioritizing debt for repayment is important because it can affect how quickly and efficiently you can become debt-free. It can also affect how easy it easy to maintain your financial motivation. A well-planned priority list will help you save time, money and ensure you can stick to your guns and see your repayment strategy through to the end.

4 strategies to pay off debt

There are four basic strategies for prioritizing debt for repayment:

  1. Pay off the debt with the highest interest rate first.
  2. Pay off the smallest balance first.
  3. Pay off the largest balance first.
  4. Consolidate the debt, so you pay them all off at once.

Q:How do you decide which debt to pay off first?

A: This can be a tricky question. From a strictly financial perspective, the best strategy is to prioritize debt by APR. If you pay off the highest APR debts first, you save money overall. Debts with higher APR accrue higher monthly interest charges. So, letting them linger costs money.

On the other hand, if your highest APR debt is also your biggest balance, it may take time to pay it all off. While this will help you save money in the long-run, you also run the risk of losing motivation. If you can’t stay motivated, you may just give up and decide you’ll just be in debt forever.

That’s not good, so you need a different strategy. In this case, you may want to start with the smallest balances first. You get a few quick wins to motivate you for tackling your biggest debts.

Of course, every financial situation is unique and prioritizing debt is highly personal. If you have a large balance that’s driving you crazy, you may decide to pay that debt off first. If it gives you peace of mind and eases your financial stress, then that may be the best strategy for you.

One final note: No matter which repayment method you choose, you should be able to pay off all your balances within 5 years. If you can’t become debt-free in 60 payments or less, you need to explore other options, such as debt consolidation.


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Strategy 1: Prioritizing debt by APR – the cost-saving method

Debts with higher APR cost you more money each month. If you have a credit card and the minimum payment is $125, interest charges will take up more of that payment with higher APR.

At 15% APR, $62.50 of your payment goes to cover accrued monthly interest charges. At 20% APR, that amount jumps to $83.33. So, each month that you leave a high APR with a balance, you’re paying for it!

This is the reason that experts often recommend prioritizing debt by APR. You pay off the debt with the highest APR first and work your way down. This allows you to save money overall. It can also help you get out of debt faster because you waste less money on interest charges.

This method is commonly known as avalanche debt repayment because it allows you to accelerate quickly. You take out the highest APR debts at the top and all your other debts quickly tumble down as well.

Strategy 2: Prioritizing debt by lowest balance to build momentum

Cost-efficiency isn’t always your sole consideration in debt elimination. Motivation is crucial. You won’t save any money if you can’t stick with your plan to pay off debt. Giving up and resigning yourself to a life of minimum payments isn’t where you want to end up at the end of your journey to get out of debt.

If lack of motivation is an issue for you, then the best strategy is often to start with your lowest balances first. It helps you gain momentum and gives you extra cash flow to tackle your largest balances. You may be more likely to stick with your repayment strategy, if you’re hitting milestones you can celebrate.

This method is commonly known as snowball debt repayment because you roll up your smallest debts one by one. Think of a cartoon snowball rolling down a hill. It starts small but then rolls up more and more snow until it’s huge.

This is what you do with your debt. You roll up all those small debts, so you have as much cash flow rolled up as possible to knock down your largest debts.

Strategy 3: Prioritizing your largest balance

This is not a very common method of debt repayment. In fact, it’s so uncommon that it doesn’t even have a catchy name like snowball or avalanche. But in some cases, you may decide that the most important debt to pay off first is your largest balance.

Here are some instances where you might decide to pay off your largest balance first:

  • The largest balance is on a 0% promotion period and you need to pay it off before that promotion period ends. This happens when you consolidate with a balance transfer.
  • Part of the balance has a higher APR because you used a specialized type of transaction, such as a cash advance.
  • The large balance is hurting your credit score because you are using more than 30% of that available credit limit.
  • You are paying off a joint account from your divorce decree so you can close the account.

In cases like these, you may decide to pay off your largest balance first. But generally, you would switch to the avalanche or snowball method for your other debts once this special case is paid off.

Strategy 4: Pay off all your debts at once with consolidation

Debt consolidation puts the pieces together to pay off debt

If you can’t pay off your balances within 5 years or all your interest rates are high enough that it’s making it impossible to pay off your debt quickly, then you may need to consolidate.

This typically involves getting new financing to pay off all your existing debts.

  • If most of your existing debt that you want to pay off is credit card debt, you may be able to consolidate using a balance transfer credit card.
  • If you have other debts that you need to repay OR you owe more than $5,000, you may want to consolidate using a debt consolidation loan.

When you consolidate, you pay off the balances on all your existing debts at once. This leaves only the balance transfer card or loan to repay. Consolidation helps minimize the interest charges applied to your debt, so you can pay off the principal faster; that’s the actual debt you owe.

How each debt repayment strategy works

To help you understand these four different options, here is an example of what your debts could look like.

Debt Balance APR
Credit Card 1 $5,000 22%
Credit Card 2 $10,000 17%
Credit Card 3 $2,000 18%
Personal Loan $7,000 9%
Student Loan $18,000 7%

Repaying debt using a snowball strategy

If you use this method, you would organize your debts for repayment this way:

  1. Credit card 3
  2. Credit card 1
  3. Personal loan
  4. Credit card 2
  5. Student loan

Download’s free debt snowball worksheet »

How snowball debt repayment works

  1. List your debts on the snowball worksheet. Put them in order of balance from lowest to highest, so your lowest balance is first on the sheet.
  2. Review your budget to temporarily cut or cut back as many expenses as possible.
  3. Enter the total amount of free cash flow that you have available to pay off your debt on the snowball worksheet.
  4. Subtract all your minimum payment requirements from your cash flow total.
  5. Add this amount to the minimum payment on the first debt to determine your new snowball payment.
  6. Make all your payments as scheduled with the larger snowball payment on the first debt.
  7. Once the first debt is repaid in full, add the snowball payment for that debt to the minimum payment for the second debt.
  8. Make that snowball payment on the second debt until it is paid in full.
  9. Continue this process for each debt, always rolling the snowball payment into the payment for the next debt as each gets repaid.

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Repaying debt using an avalanche strategy

If you use the avalanche method, you would organize your debts for repayment this way:

  1. Credit card 1
  2. Credit card 3
  3. Credit card 2
  4. Personal loan
  5. Student loan

Download’s free debt avalanche worksheet »

How avalanche debt repayment works

  1. List your debts on the avalanche worksheet in order from highest to lowest APR. So, the debt with the highest APR should be listed first.
  2. Review your budget to temporarily cut or cut back as many expenses as possible.
  3. Enter the total amount of free cash flow that you have available to pay off your debt on the snowball worksheet.
  4. Subtract all your minimum payment requirements from your cash flow total.
  5. Add this amount to the minimum payment on the first debt to determine your new avalanche payment.
  6. Make all your payments as scheduled with the larger avalanche payment on the first debt.
  7. Once the first debt is repaid in full, add the avalanche payment for that debt to the minimum payment for the second debt.
  8. Make that new avalanche payment on the second debt until it is paid in full.
  9. Continue this process for each debt, always rolling the avalanche payment into the payment for the next debt as each gets repaid.

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Repayment that pays off the largest debt first

Using this method, you would organize your debts for repayment as follows:

  1. Student Loan
  2. Credit Card 2
  3. Personal Loan
  4. Credit Card 1
  5. Credit Card 3

This method is used the least because it neither accomplishes the goal of “crossing something off the list” or saves on high interest rate payments. However, if it is the largest debt and also has one of the highest interest rates, you would largely be following the avalanche method. In this case, you could save yourself a lot of money by avoiding interest charges on such a large sum.

Repaying your largest balance first

If there’s a specific reason that you need to repay your largest balance first, regardless of its APR, then you should focus solely on that debt.

  1. Review your budget to free up as much cash flow as possible.
  2. Cut everything you can, because you’ll need to maximize cash flow if you want to pay off your largest balance quickly.
  3. Make all your other minimum payments as required.
  4. Put as much cash as possible each month to paying off this largest balance.
  5. Once you have that balance paid off, consider switching to avalanche or snowball to pay off the rest of your debts.

Consolidating your debts

Using debt consolidation, you would pay off the debts in one of the following ways:

Option 1: Consolidating all your debts together with a loan

In some cases, you may be able to find a consolidation loan that allows you to combine student loans and the rest of your debts together. However, this depends on the lender; some lenders won’t allow you to consolidate student debt with other types of debt. Still, at the very least, you could consolidate the credit cards and loans together.

  1. The personal loan and three credit cards would be consolidated into one payment
  2. Since the total amount would be $24,000, that’s more than you can pay off effectively during a balance transfer introductory period.
  3. Let’s say you qualify for a debt consolidation loan at 8% APR because you have excellent credit.
  4. Since that’s still higher than the student loan, you’d pay off this consolidated debt first.
  5. With a term of four years, the monthly payment would be around $586; with a 36-month term, the monthly payment would be around $752.
  6. This allows you to pay off all your other debts in 36-48 payments, leaving only the loan to repay.

Option 2: Consolidating all credit card debt with a balance transfer

  1. Use a balance transfer to consolidate the three credit card debts into one payment
  2. With excellent credit, let’s say you get a card that offers 0% APR for 18 months.
  3. That gives you 18 months to pay off $17,000 in debt interest-free.
  4. If you could afford payments of $950, you’d eliminate the debt in-full during the 0% APR period.
  5. That leaves the two loans to repay, freeing up all the money you were using for credit cards.

Not sure about the best way to consolidate your debt? Talk to a consumer credit counselor at no charge for a free evaluation

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Don’t Forget “Important Debts”

Tax Debt: The one type of debt you don’t want to linger

This is not exactly a repayment strategy, but it’s important to understand who you owe money to. That’s especially true when the collector you owe is the IRS.

If you have tax debt, then repaying it should fall as the most important debt on your priority list. That’s because the IRS has the ability to garnish your wages and put liens against your property. In addition, penalties and interest charges continually accrue, even if you qualify for Currently Not Collectible status or enroll in an Installment Agreement. So, it’s critical to pay off this debt before all others and to pay off it as quickly as possible.

If you owe back taxes, put them at the top of your list. You don’t want to keep adding to what you already owe!

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Mortgage and Auto Loans: Pay first, pay off last

It’s worth noting here that paying off first is a separate concern versus paying first. If money is tight and you’re deciding which bills to pay first, you pay first on anything that affects your life and livelihood. This includes debts like your mortgage and auto loans. You don’t want to lose your house or lose the car you use to get to work.

On the other hand, these types of debt should be paid off last. They’re fixed payments that you can afford, so they generally cause the least problems for your budget. As a result, you should pay the bills on time as scheduled, but don’t worry about paying them off until you’ve eliminated everything else. Then you can decide if you want to devote extra cash to pay off your auto loans and then your mortgage.

What about medical debts?

Medical debts also need to be repaid but aren’t as important as tax debts. Work with your provider to pay whatever you can afford each month or try to negotiate the amount due to see if they would be willing to write off some of your debt. You can also explore putting these debts into a debt consolidation plan, because you can usually consolidate them, too.

Stick to It!

The most important part of creating a debt payoff plan is to stick to it. Make sure you pay all your debts each month and don’t incur too much more debt along the way. As long as you stay with your plan, you will eventually get to celebrate being debt-free. And remember, the better you are at prioritizing debt payoff in a way that fits your financial state of mind, the more likely you are to be successful.

If you want help prioritizing your debts, check out our debt repayment calculator.

Which Bill Do I Pay First?

A reader has only enough to pay the mortgage, car lease, or credit card. But not all three.

Question: My mortgage is almost $1,800 a month, my car lease is just under $1,000 a month, and just to keep my credit card balances from growing means another $700 a month. I got laid off last month but luckily found a new job right away.

What stinks is, the new job doesn’t pay as much, and I have zero savings. It’ll take me a couple months for my income to catch up to my expenses, so which bills do I NOT pay for a few months? If I can blow off the mortgage or car loan, I can really get back on my feet.

— Alfred in California

Howard Dvorkin CPA answers…

Questions like these upset and depress me. I’ll explain why as soon as I give you a definitive answer:

Pay your mortgage. Even though it takes awhile, depending on your state, to foreclose, you don’t want to mess with your largest investment — not to mention the only roof over your head.

Pay your car lease. First, call the finance company and politely explain your situation. Sometimes, you can get an extension, but that usually happens only if you’ve already made a half-dozen payments already. Cars can be repossessed very quickly, and I’ve heard horror stories from clients who have had their vehicles towed away after missing a single payment.

Run up your credit cards even more by making the minimum payments. This pains me to say, because I’ve written books urging Americans to pay off — then cut up — their credit cards. However, after a follow-up conversation with you, Alfred, I learned you had none of the usual options.

You have no retirement account to borrow against, you have no equity in your home because you took that out and spent it on a European vacation, and you never even had a savings account.

Your family won’t lend you any money because you already owe them for the down payment on the house, and you didn’t even mention the $20,000 in student loans you’ve deferred but will come back in a big way very soon.

Most people reading this will empathize with being in debt but may doubt some of your choices. Their sympathy might disappear when they learn your previous job paid you more than six figures, yet you not only managed to spend it all, you actually had to borrow to get your house — which is much bigger than you need.

As for the car, you leased an expensive BMW because, and I’m quoting you here, “The women are impressed by it.”

Here’s the bottom line, Alfred: You need help more than you need cash.

In more than two decades counseling people about their debt, I’ve seen your case many times: Otherwise smart individuals who have a blind spot when it comes to managing their money. If you were to win the lottery tomorrow, Alfred, you’d be broke in a few years — because the problem is all in your head, not in your wallet.

So I urge you — and anyone who recognizes themselves in this description — to call a counselor today at 1-800-810-0989 for a free consultation. The best way out of this mess is a holistic approach, encompassing not only your credit card debt but also your student loans. At the very least, please read the Money Management section to get some idea of where you stand.

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Article last modified on August 30, 2023. Published by, LLC


Howard Dvorkin, CPA

CPA - Chairman & Personal Finance Expert