Which Debt Should I Pay Off First?

If you're trying to pay off debt and improve your financial security, you're on the right track. Deciding which debts to focus on while you work toward your goal is key to making the best use of your resources.

The right debt payoff strategy for you will depend on the kinds of debt you have, as well as how much you can afford to pay toward your debts each month—or if you can afford your debts at all. Let's look at which debts to prioritize in your budget, as well as how to decide which debts should get extra attention.

Which Payments Should You Prioritize First?

It's often a good idea to give every dollar in your budget a job. The money set aside for debt payoff can then be portioned out based on your repayment strategy. 

To get started, list each of your debts, including their balance, interest rate, and minimum payment. This gives you a big picture of where you stand and what you owe. Make sure to note whether the debt is secured—backed by something of value, like your house or car—or unsecured (not backed by any collateral).

Next, determine how much money you can afford to put toward debt repayment each month. With that number in mind, it's time to prioritize.

Make payments on secured debts first

Secured debt is debt that is backed by some type of collateral. This is something that your creditor can seize and sell if you don't keep up with your payments as scheduled. Some common types of secured debts are:

• Mortgages (backed by the home)

• Auto loans (backed by the car)

• HELOCs (backed by the home)

While falling behind on a credit card payment could trigger late fees and a dip in your credit score, that's a much smaller problem than losing your home or the car you need to get to and from work every day. Make these payments first so your property isn't at risk.

Next pay all your minimums for unsecured debts

Unsecured debt is debt that is not backed by collateral. The creditor only has the word of the borrower that they will keep up with their payments. Some common examples of unsecured debt include:

• Credit card debt

• Medical debt

• Most personal loans

These debts typically have a minimum payment you need to make each month to keep your account in good standing. Always make your minimum payments before the due date to avoid credit damage and late fees.

Anything extra goes to high-interest debts

Ideally, you'll have some money left over to put toward your debt even after your secured debts are paid and you've met all your minimums. At this point, that extra cash should go toward paying down high-interest debts that are costing you big to carry.

The two most popular methods for prioritizing multiple debts are the debt snowball and the debt avalanche. They both involve making the minimum payments on all accounts, then focusing extra money on one account at a time.

• Debt snowball: With the debt snowball, you focus on the account with the smallest balance first. This gives you a quick win that can be really motivating. Then, you can move on to the debt with the next-smallest balance.

• Debt avalanche: With the debt avalanche, you focus on the account with the highest interest rate first. When that debt is paid off, move on to the debt with the next-highest interest rate. This method saves you the most in interest charges. 

Once you've selected your target, you'll pay as much as you can toward reducing that account balance—to make it go away as soon as possible. When you zero it out, you'll free up more cash that you can use to take aim at the next target. And after you clear that balance, you'll have even more money to accelerate the next debt, and so on. 

What To Do If You Can't Afford Your Debts

When debt is overwhelming, the budget runs out well before the bills do. When you can't budget your way to financial freedom because the income just isn't there, it's time to consider your debt relief options.

If your credit is in fair shape, you could consider consolidating your debts. This is when you use a new loan to pay off multiple debts. Debt consolidation could streamline your finances and potentially save you money if you can qualify for a lower interest rate.

If you have too much unsecured debt, debt settlement could be worth exploring. Debt settlement means convincing your creditors to accept less than you owe as payment in full. The rest of the debt gets forgiven. You can negotiate your debts on your own, or you can work with a professional debt settlement company like Freedom Debt Relief. 

Bankruptcy could also be an option to get rid of overwhelming unsecured debts, especially if you have few assets. Chapter 7 bankruptcy could wipe out eligible debts if you qualify. Consult with a bankruptcy attorney to discuss if it's an option.

Set Yourself Up for Long-Term Financial Security

Once you've chosen a strategy you think will work for you, do your best to stick with it. Check in with yourself every few months to make sure you're still on track, and celebrate the small wins along the way. Paying off your debts takes time, but it's well worth it.