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What debt to pay off first - your highest interest or smallest debt?

What debt to pay off first, your highest interest or smallest debt?
(Image credit: Getty)

If you have many debts to your name, it can be difficult to work out what debt to pay off first. All you want to do is take control of your debt, and reduce what you owe, but where do you start? Whether you have personal loans (opens in new tab), credit cards, or both that you’re trying to pay off, the key lies in prioritizing your debts and then paying them back in the order that works to your advantage the best. 

What this doesn’t mean is that you neglect paying some of your debts until your priority debt is paid off. Indeed, what you must always do is make the minimum monthly payment on each and every debt that you owe in order to avoid extra charges and higher rates of interest being imposed. Instead, when it comes to the question of what debt to pay off first, we’re actually trying to decide where any extra money, above meeting your minimum payments, should be directed to best benefit your debt situation. With this in mind, let’s explore what debt to pay off first.

Which debt to pay first?

On the whole, people with debt to pay off can adopt one of two strategies - either paying off the debt with the highest interest first, or alternatively tackling the smallest debt that they have first, before working their way up in size order to their biggest debt. Each method has its own merits and downsides, but which is best for you will usually depend on your circumstances and the motivation that you need to pay off your debt. 

Should you pay off high interest debt first?

What debt to pay off first, your highest interest or smallest debt?

(Image credit: Getty)

It intuitively makes sense to pay off your highest interest debt first as it’s the debt that is costing you the most in interest. So if you focus on clearing your most expensive debt first, you will save on interest payments over the long term, and have extra funds to use for paying off your other debts. As we’ve said already, you must continue paying the minimum monthly payments on all of your credit cards (opens in new tab) and personal loans, but once this is done, you’d put any extra funds you can afford for debt repayment towards paying down the card or loan that has the highest rate of interest.

Should you pay off the smallest debt first? 

While paying your high interest debt first is a great strategy, if this particular credit card or loan represents your biggest debt, then it might take some considerable time to start making notable inroads towards your aim of paying it all off. For this reason, many people actually favor paying off their smallest debt first, and then work their way up to the largest debt, as a way to keep themselves motivated. 

Yes, you’ll likely rack up more interest if you leave some of the higher rate debt untouched, but the psychological impact of actually clearing one debt, and the motivation this provides to quickly move onto paying off the next one, should not be underestimated. Again, you’ll need to make the monthly payments on your debts, but by then focusing your efforts on getting rid of your smallest debt first, you should quickly find yourself inspired to stick with the task at hand, and ready to tackle the larger debts that you have as a final hurdle to becoming debt free. 

Also remember that the faster you pay off your debt, the better it is for your credit score. So if you've recently been considering the best credit repair services (opens in new tab) to give your credit rating a boost, perhaps concentrating on paying your smaller debts down faster will provide you with a welcome credit score boost.

What debt to pay off first, your highest interest or smallest debt?

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Always pay payday loans first

If you have a payday loan (opens in new tab), the only strategy you should adopt is to try and pay this riskiest of loans off as a priority. With interest rates that can quickly approach 400% if you fall behind on your payments, and debts having the potential to snowball rapidly as a result, making sure you clear this riskiest of debts first is a must. And if you’re in too deep with a payday loan already, you should definitely seek the advice of a debt counselor to see if they can help with your situation. 

Is debt consolidation a good idea?

If you’re finding it difficult to keep on top of your debts in the round, as well as wondering what debt to pay off first, the best debt consolidation companies (opens in new tab) could prove a useful option. These services provide the chance to secure a single loan that should be sufficient to pay off all your existing debt in one hit, therefore leaving you with just the one consolidated loan to focus on and pay off. 

There’ll be no more dilemmas over debt priorities, it can be good for your credit rating (opens in new tab), and if you’re paying relatively high rates of interest on your existing debt, hopefully your new debt consolidation loan will come in cheaper overall too, providing the opportunity to make your monthly debt payments more manageable and to move towards a debt free future that much quicker. 

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.