Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
In the journey towards financial freedom, determining which debt to pay off first is a pivotal decision. With various debts demanding your attention, it can be challenging to know where to start.
This post clarifies the process, guiding you through practical and effective strategies to prioritize your debts. Whether you're burdened by high-interest credit cards or looking for a way to manage student loans, you'll find insights on how to make informed choices that align with your financial goals.
By adopting a strategic approach to your debts, you can pave a clearer path to reducing your financial burden and achieving peace of mind.
If you'd rather speak to a debt specialist now, click here for a
free consultation.
Priority Bills You Should Be Paying First
Your first most important bill should be to pay for your housing, your rent or mortgage. If you fail to pay these, you may end up homeless or needing to find a new home. If you are having trouble making your housing payments, you may want to consider moving to a less expensive home, finding roommates, or trying to lower expenditures. Consider utility bills as part of your housing expenses and try to lower those, at least for a time.
The next bill that should be paid is your child support, if you have any. Not only are you responsible for your children but missing child support payments can end up in jail time. You may be able to negotiate a temporary decrease in child support payments.
Another very important bill is anything to do with your taxes. The penalties are quite high, about 25% of the amount you owe each month you are delinquent. Not paying your taxes can result in levies, garnishments and possibly jail time.
Your final most important bill to pay is your auto loan. If you lose your car, it may be incredibly difficult to work and then your financial situation will be even more serious. If your car is more expensive than you can afford, you may want to sell the car and find something more affordable.
Debts to Pay
The next stack of bills are those that may need to be paid off using some of the more common strategies. These bills include credit cards, personal loans, medical bills, student loans, and any bills in collections.
Read our article
What’s the Best Way to Pay Off a Debt in Collections
Missing any of these bills can cause you problems. You may end up with damaged credit or end up being sent to collections. Let's take a look at each category and the pluses and minuses for paying them.
Credit cards can create a vicious cycle. Missing credit card payments can result in higher interest rates and increasing penalties. Prioritize credit card bills toward the top. And quit using your credit card!
Personal loans are like credit card debt, but generally don’t come with the penalties for not paying your bills. There is nothing securing the loan, so you won’t lose your home or car but you will end up with damaged credit.
Medical bills can be very problematic. You needed the treatment but now have what can be unreasonable bills. Most public hospitals may allow you to work out a very low monthly payment plan and as long as you don’t miss a payment, they will most likely work with you. It is definitely worth asking.
Student loans come with some options if they were issued by the federal government. You may be able to petition for forbearance or deferment and buy you a bit of time to get your feet back on the ground.
Collections are a problem for your credit report. But to be frank, you are already in collections and have already had your credit damaged. Consider putting these at the bottom of your payment stack. However, if you are threatened by an agency filing a motion to sue, always follow through and don’t ignore the documents coming from the court system!
If you have debt that comes with some sort of tax benefits, like second mortgages, include those in the paying down debt category, but towards the end of the importance ranking.
Learn the Different Strategies for Paying Down Debt
There are four different ways to pay down your debt. These are the Snowball, the Avalanche, the Balanced Method, and the Debt Consolidation.
The Snowball involves paying off the smallest debt first, then rolling that payment onto the minimum payment of the next smallest bill and paying down that one. Imagine a snowball rolling downhill and getting larger and larger as it picks up snow. This method has a psychological advantage of the satisfaction of seeing immediate progress.
The Avalanche involves paying off the highest interest rate debt first and then rolling that payment onto the next highest interest rate debt. This method does decrease the amount of interest that you pay over time.
The Debt Consolidation means that you take out a loan and pay off your existing debt and then pay off the loan. This is dependent on getting a loan with a better interest rate than your current debts. If you’ve damaged your credit score, this may not be a possibility. However it is worth looking into zero balance credit card transfers (watch out for fees!) and personal loans.
The Balanced method involves paying off the smallest debts first and then working on the higher interest rate debt. You may also be able to consolidate some of the debt on a separate loan. You get the best of all three worlds.
Read
The Fastest Way to Pay Off a Credit Card for more information on strategies to pay off debt.
If you run your debts through a snowball and an avalanche calculator, you will see that there is not much difference in time or even in interest payments. Pick the one that will work the best for you and that you can stick with. Pacific Debt Inc also has a
debt calculator to help you make an informed decision about how much you can save by making slightly more than minimum payments.
Prioritizing Your Bills
To help you decide which method works for you, you’ll need to take a look at your debt. Write down all your debts, the total amount of the debt, the interest rates, minimum payments, and the due dates. Prioritize the bills in this order:
- Must Pay
- Housing/utilities
- Child support
- Taxes
- Auto loans
- Pay (ordered by interest rate or smallest to largest)
- Credit cards
- Personal loans
- Medical bills
- Tax Benefit Debt (make minimum payments and make sure you claim your tax benefits)
- Second mortgage/HELOC
- Student loans
- Lowest Priority
- Bills in collections
Your goal is to make minimum payments on all debts. Once you know how much you are paying on the Must Pay category, put minimum payments on your credit card debt, personal loans, and then medical debt. Is there any left or can you squeeze money from somewhere else? Apply that to either the highest interest bill or to the smallest bill.
While you are doing that, contact your debtors and see if you can work out a better payment plan, ask for
forbearance, or change due dates to more closely match your pay days.
Your Credit Score
Your credit score is based on about five factors. The two most important factors to improve your credit score is to pay your bills on time and how much you owe versus the credit limit (credit utilization). These two factors represent 45% of your credit score.
Which debt should you pay off first? Pay off credit cards with the highest credit limit and lowest balance to take advantage of improved credit utilization.
Rebuilding your credit score will take time but it can be done! We cover improving credit scores extensively in our blogs, so you can get a lot of detailed information there.
For more information about your credit score read
The 5 Main Credit Score Factors You Need to Know.
If you can not make the minimum payments and have more than $10,000 in credit card debt and you feel like
bankruptcy is your only option, there are still solutions available. Give the debt specialists at
Pacific Debt, Inc a call to understand all your options.
Budgeting Tips to Free Up Cash Flow
As you work to pay down debt, finding ways to free up cash in your
monthly budget is key.
Here are some budgeting tips:
- Evaluate Expenses - Review all of your expenses from necessities like housing and transportation to discretionary categories like dining and entertainment. Look critically at each line item. Are there expenses you can trim back temporarily while paying off debt? Can you downgrade to a less expensive car insurance plan? Do you need cable TV or could you just use streaming services? Finding even small cuts in numerous areas adds up.
- Cut Discretionary Spending - Areas like dining out, recreation, hobbies, and shopping are easier to trim than fixed bills. Limit these categories to an "allowance budget" for the time being so you can allocate more to debt payments. Getting takeout just once a week instead of multiple times is an easy way to save.
- Downsize Housing - Housing is many people's largest monthly expense. Consider downsizing to a smaller living space or taking on a roommate to cut this expense. Even a couple hundred dollars monthly savings makes a difference to your cash flow and debt payments. Just make sure to budget appropriately for moving costs if relocating.
- Earn Extra Income - Adding secondary income streams accelerates your debt payoff ability. Take on a weekend side gig delivering food or driving for a rideshare service. Or leverage skills from your full-time job for freelance work. The key is being realistic - don't overcommit your schedule. But a few extra hundred per month from a side job can pay dividends.
Improving Your Credit Score
As noted earlier, paying down debts - especially credit cards - can increase your credit score by lowering your overall utilization rate. Along with making payments, be sure to avoid late payments, errors on your report, and closing old credit card accounts. Keeping accounts open with on-time payments demonstrates positive credit management to scoring models.
Read our article on
improving credit scores.
Debt Consolidation Options
If you have high-interest rate debt, consolidation could help lower costs.
Two options to research further:
- Balance Transfer Cards - These special credit cards allow you to transfer existing debt onto a new card, often at a very low or 0% interest rate for an introductory period (12-21 months). This saves on interest costs in the short term. Just be sure to have a payoff plan prior to the regular APR kicking in.
- Personal Loans - Banks and credit unions offer debt consolidation loans designed to pay off credit cards and other debts in a single monthly payment. If you qualify for a rate notably lower than your current debts, this can save substantially on interest expenses. Be aware of any origination fees charged.
Always compare multiple offers to ensure you choose the right solution for your unique debt scenario.
Dealing with Debt Collectors
If you have fallen behind on certain debt obligations, you may start getting contacted by collections agencies who buy past-due debts for pennies on the dollar. Know that some older debts typically fall off your credit report after 7 years. In the meantime, be cautious with any payments or arrangements, and don't hesitate to push back on unreasonable requests.
Learn more in our article about
strategies when dealing with debt collectors.
FAQs
Pacific Debt, Inc
Pacific Debt, Inc. is an award-winning debt settlement company. If you’d like more information on how to get out of debt, we are happy to help. We will explain all your options and help you decide which is the best option for you. We can even refer you to trusted partners who can better meet your needs if necessary.
If you have more questions, contact one of our
debt specialists today. The initial consultation is free, and our debt experts will explain your options.
Conclusion
Deciding which debts to tackle first requires understanding your financial situation and what motivates you. There are compelling reasons to target high-interest-rate debt through the avalanche method which saves money long-term. Paying off smaller debts first through the snowball method builds momentum.
Optimizing your credit score keeps future borrowing options open. Consolidating using balance transfers or loans simplifies finances. There is no one-size-fits-all approach. The best strategy depends on your income, expenses, financial goals, and willingness to make lifestyle changes.
Creating a customized debt payoff plan requires honesty about these factors. Staying disciplined also means recognizing roadblocks like loss of motivation and addressing problems proactively before small setbacks spiral.
With focus and commitment, every dollar paid moves you closer to the ultimate reward of becoming debt-free. Consult an advisor to develop the optimal repayment strategy, then constantly revisit and refine details to ensure you achieve this life-changing goal. The freedom gained when you succeed makes every ounce of effort worthwhile.
*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.
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