How to Prioritize Debt Payments

How to Prioritize Debt Payments Infograph

The average American household owes more than $7,000 in credit card debt, and the country’s total credit card debit is nearly $900 billion. 1 The kicker? Eighteen percent of Americans have three to four cards, nine percent have five to six and seven percent have more than seven. 2

That means many have to contend not only with paying down their debt each month, but on which cards and in which order.

These tips can help you pay down debt in an order that works for you.

Identify Your Monthly Debt Payment

All the best intentions won’t get you far if you don’t know how much you can pay toward debt while still paying the non-negotiables like rent or mortgage, with money left over for food and incidentals. To do this, write down your sources of income, then your fixed expenses, like the aforementioned rent or mortgage, plus things like insurance and car payments. Then jot down variable expenses like groceries, gas and clothing. This will help you identify necessary expenses, and those that can be pared down and put toward your debt repayment. 3

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Choose A Personal Payment Plan

Get that pen and paper out again. That’s because you’ll want to map out what interest rates you’re being charged. The reason? There are two schools of thought when it comes to debt repayment: “debt snowball,” which involves paying off the smaller-interest-rate cards first, and “debt avalanche,” which—you guessed it—focuses on paying off the highest-interest debt. 4

  • Paying Off The Smallest Balance First: Some financial experts argue the best way to tackle multiple debt loads is to start with the smallest balance. The logic here? Get it out of the way so you can start to tackle the rest with the money no longer owed on the first. 5 This is best if you’re the kind of person who would benefit from the constant positive reinforcement of getting your debts paid down and out of the way.
  • Paying Off High-Interest Debt First: Conversely, other financial experts urge those in debt to tackle the higher-interest debt loads first. The benefit here is that you pay less overall interest, saving you money in the long run. The negative? It may take longer to close your debts out if you have the largest balance on the highest-interest card. 5

Avoid Late Payments

If you’ve been diligent about sticking to your plan and paying down your monthly balance, you may be tempted to skip a payment every once in a while and put that money toward something else. Don’t. That’s because, in addition to late fees and rising interest rates, late payments may also show up on your credit reports. What’s more, since payment history accounts for 35 percent of your credit score, even one late payment may lower it. 6

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