Debt Prioritization: What Bills to Pay First

When you’re juggling multiple debts, it can be hard to know which debts to prioritize first. With that in mind, below is a guide to debt prioritization. We’ll walk you through how to prioritize your debts and get started with a repayment plan from start to finish.

Why is debt prioritization important?

If you feel like you’re struggling to manage multiple debts, it can be a good idea to prioritize them and come up with a dedicated debt payoff strategy. There are a few reasons why it will likely be beneficial.

• Ignoring debts can have negative impacts: When you ignore existing debts or default on a loan, those decisions can have negative consequences. In some cases, your credit score may be impacted, making it harder for you to borrow money again in the future. In others, the asset you’re using as collateral may be repossessed. Sometimes, a lender can take you to court. In the case of tax debt, you may even face jail time if you fail to repay what you owe.
• Carrying debt can be expensive: The vast majority of debt comes with interest charges attached. Expressed as a percentage of the principal loan balance, interest is a fee that the lender charges you in exchange for lending you money. As a rule of thumb, the longer you carry your debts, the more interest you’ll be charged. So, facing your debt head-on can help you save money in the long run.
• Not having a plan can be confusing: When you don’t have a debt repayment plan in place, it can be confusing to know which debts to tackle first, especially if your debts exceed your income and you have to stick to making a few minimum payments. Often, it can feel overwhelming and like you’ll never be able to become debt-free. However, once you prioritize your debts and start working on your plan, it will become much easier to see the light at the end of the tunnel.

How to prioritize debt payments

Now that you know why it’s important to prioritize your debts, the next step is to learn how to arrange them. While the truth is that there’s no one-size-fits-all answer to debt prioritization, the following metrics may give you some idea of how to get started organizing.

• Delinquent accounts: If you have delinquent debt, you may want to take care of those accounts first. Like debt in collections, this is the type of debt that can have broader negative impacts than just damaging your credit score.
• Types of debt: Likewise, it may be a smart idea to pay secured loans, like your mortgage or an auto loan, before other forms of unsecured debt because the lender has the option to repossess your asset if you default.
• Interest rate: Next, consider interest rates. Some forms of debt, like personal loans, have fixed interest rates, which makes it easy to budget for repayment. Credit cards, on the other hand, usually have higher interest rates that are variable, which can make it more difficult to chip away at your outstanding balance.
• Principal balance: In some instances, you may want to tackle your debt with the smallest balance first. Paying off a debt early on may help you stay motivated to take on bigger balances. In others, it may make more sense to take on your largest balance first, because once you’ve paid it down, it will have the biggest impact on your credit score.

4 debt payoff strategies to consider

If you’re still unsure of what method you want to follow for prioritizing your debts, here are four common debt payoff strategies that may help.

Debt avalanche method

The debt avalanche method involves paying off your highest-interest debt first. To do this, you’ll make the minimum monthly payment on every card or loan you have, except for the debt with the highest interest rate. Then, you’ll put all your extra money toward paying down that balance as much as possible.

The theory behind this is that your debt with the highest interest rate is also the one that is costing you the most money in interest charges. By paying it off first, you’ll be able to put more money back into your pocket and use it to pay off your other debts faster.

Debt snowball method

Meanwhile, the debt snowball method takes the opposite approach from having you pay off high-interest debt. This method asks you to tackle your smallest debt first while making the minimum payments on the rest of your accounts. Then, after you’ve paid off the smallest balance, you’ll put your extra income toward the next-smallest balance and so on.

The debt snowball method banks on the hope that you’ll stay motivated if you create a series of small wins for yourself at the beginning of your debt payoff journey.

Debt by impact on credit score

On the other hand, if you have a significant amount of credit card debt, you may want to organize paying it off by its anticipated impact on your credit score. Put simply, your credit utilization ratio, or the amount of credit you’re using versus the total amount of credit you have available to you, accounts for 30% of your overall FICO score.

By paying down your balances with the highest utilization ratios first, you will have the biggest impact on your overall credit score. To determine which credit card balances to work on first, look at the amount of credit you’ve used versus that card’s credit limit. The cards with balances closest to the credit limit will likely have the highest utilization ratios.

Debt consolidation

Finally, if you have multiple balances with high annual percentage rates (APRs) and different payment dates, it may make sense to consider debt consolidation. Debt consolidation involves taking out a new loan and rolling all your existing loan balances into it.

This method is common among those who are having trouble managing multiple credit card balances or student loan payments. It can be an efficient way to streamline multiple debt payments into one, ideally at a more affordable interest rate.

Next steps after debt prioritization

After learning about the various debt payoff strategies that exist, you may be wondering how to get started paying down your balances. Here are the next steps you should take.

1. Organize your debts: Before you can get started paying down your debts, it’s important to take stock of where you are financially. Create a list of all your existing debts, including:
   1. Principal balance
   2. Minimum payment amount
   3. Payment due date
   4. Current interest rate
2. Decide on a debt payoff strategy: Once you have all that information in front of you, look at the various debt payoff strategies listed above and decide which one will likely work best for your financial goals.
3. Create a new budget: After you’ve picked a payoff strategy, it’s time to take another look at your current household budget. Figure out how much money you can allocate toward the first balance you hope to pay off while still covering your bills and all other minimum monthly payments.
4. Allocate the money according to your debt repayment plan: Then, each month, distribute the money in your budget according to your debt repayment plan. If you stick to your plan long enough, over time, you will begin to see results. Eventually, you’ll be able to pay off your debt for good.