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Which debt should I pay off first?  |  Credit card

If you’re in the unfortunate position of trying to decide which debt to pay off first, I know it’s stressful.

It’s easy to feel like you’ll never have sanity again. But you can control your debt and start reducing your balances. The key is to prioritize your debts and pay them off in the most beneficial order.

I will cover both credit cards and certain types of loans. You will learn the following:

There are several strategies you can use to pay off your credit card balances. If you’re thinking of settling your debt the old-fashioned way — one credit card balance at a time — here are three options to try:

The debt avalanche approach starts by paying off the card with the highest annual percentage rate first. Then you redeem the card with the second highest APR and so on. This strategy saves you the most money because you pay less interest.

This approach starts by paying the card with the lowest balance first, regardless of the APR. Then you redeem the card with the second lowest balance and so on. With this strategy, you pay more interest. So why would anyone consider this? Proponents say it works for those who need quick success. You get a quick win because you start with a small balance.

It’s my own debt reduction strategy, and it combines the best of both worlds. This approach starts by paying the card with the lowest balance first to get an adrenaline rush. Then you go avalanche and pay the card with the highest APR down to the card with the lowest APR. So you get a quick win for a morale boost and then start saving on interest.

If you’re in debt on high APR credit cards, it’s easy to think you’ll never get out of debt, especially if you pay them off one balance at a time. Here are two options that might help you avoid — or at least reduce — the interest you pay.

You’ll need a great credit score to qualify, but if you can get approved for a balance transfer credit card, it’s a great option. You will get an introductory APR of 0% for typically 12-21 months. During this time, you pay off your debt without paying interest. Sounds amazing, doesn’t it?

The downside is a possible balance transfer fee, which is usually 3% to 5%. But even if you factor in fees, you can still save a lot on interest if you have balances on high APR credit cards.

OK, what if your score isn’t good enough to qualify for a credit card balance transfer? If you have at least a good score, you could get a debt consolidation loan and save money on interest. You won’t get a 0% introductory APR, but you could get a loan with a lower APR than your credit cards.

There are many types of loans. There are secured loans and unsecured loans. Credit cards are unsecured loans, which means that if you don’t pay, the issuer can’t come to your house and take your car (or your house, for that matter). You are not placing anything of value, such as property, to secure the loan.

So if you’re having cash flow problems, you can temporarily pay minimums on your credit cards if you need the money to meet your secured loan obligations, like your mortgage or car payment.

Let’s take a look at each of these loans and you’ll understand how to prioritize your debts:

If you got into a cycle of debt, focus on paying it back before it does more damage to your finances. Payday loans are unsecured, but the interest rate alone makes them a priority for profitability strategies.

Credit cards are an example of revolving debt. You have a credit limit, but you decide if and when you use your card. An installment loan has a fixed interest rate and the number of years you have to pay it back varies. A auto loan is an example of an installment loan.

A car loan is a secured installment loan because the lender uses the car as collateral. This means that if you don’t make the payments, the lender can pick up your car. It is therefore a payment that you must make. If you can’t make the monthly payment, call your lender and work out a payment plan. Don’t ignore a secured loan!

If you have a large expense and need time to pay it, a personal loan might work. Rates are reasonable if you have good credit. Personal loans can be secured or unsecured.

Another option is to use your home as collateral and get a home equity loan or one home equity line of credit, or HELOC. A home equity loan has a fixed interest rate for a certain period of time. A HELOC is a revolving line of credit, so you decide how much credit you need and make monthly payments. But it’s a secured loan, so don’t do it if you’re not sure you can make the payments.

Here’s an insider tip: If you have really good credit and think you can pay off the loan in about 18 months, consider getting a credit card with an initial purchase APR of 0%. You will be able to repay the balance without paying interest. This is an unsecured loan, so you won’t have to risk losing your home.

When financial resources are limited, it is essential to manage your money well. You might be wondering if it’s better to save some money right now in case you need it.


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