How to Determine Which Debt to Pay Down

It's easier to get into debt than to get out of it, but help is available.

consumer girl image by Lev Dolgatshjov from

Whether you find yourself in deep debt or you are just beginning to realize that you are slipping into a financial abyss, putting into place an immediate, sensible bailout plan can benefit both your personal bottom line and your stress level. There is no shortage of debt pay-down methods and theories floating around financial circles. Your job is to determine which one suits your lifestyle, timetable and sensibilities and get to work.

Pay High-Interest Debts First

Financial writer Luke Landes endorses the "debt avalanche” plan, in which you attack accounts with the highest interest rates first, regardless of their balance. Make a list of your outstanding accounts ranked by interest rate. Pay the minimum payments on all accounts, then put any extra money toward the account with the highest interest rate. When that account is paid off, go to the account with the next highest rate and so on as you work down your list of accounts. Landes calls his model a “mathematically correct way of paying off that debt.” To decide if this method is best for you, peruse your monthly statements to see exactly how much long-term debt you’ll accrue over time if you make only minimum monthly payments. If knowing exactly how much extra cash you’ll be forced to pay in the long run bolsters your determination to vanquish your debt load, this might be a good method for you.

Pay Off Smallest Debts First

If you are motivated by small, frequent victories, consider financial expert Dave Ramsey’s “Snowball” plan: You knock off small debts first and work your way up to the bigger ones, celebrating the milestones of paid accounts as you go. "It makes better financial sense to pay down the highest interest rate first. But people get discouraged. So they knock down lower balances first," says Steve Rhode, co-founder of Myvesta, making a case for this method. Your list of debts grows shorter faster, providing a psychological boost. That stated, there’s lots of research indicating this method isn’t an ideal choice for folks with spending issues. If you believe that seeing zero balances will trigger renewed spending, this methodology likely isn't in your best interest.

Pay All Debts in Equal Measures

Some financial analysts recommend a hybrid approach: First, knock off the small debts. Then rank the remaining bills according to the interest rate and begin phase two of the pay down. Determining your proclivity for sticking to an equal pay-down scheme can depend upon whether you have the patience to stick to the plan. This is not a good choice if you can’t wait to knock everything off the list because your intention is to get back on the spending horse again.

Find a Debt Consolidator

Perhaps you’re clueless about which type of pay-down methodology is right for you but you know yourself well enough to understand that you can’t do it alone. You may do well with a debt consolidator. Choose one with the right credentials, certifications and industry pedigree. According to a Care One Credit consumer website article, “A debt consolidation company may be able to help you pay off your debt more quickly and alleviate some of the stress associated with paying bills.”