How should I prioritize paying off my debts?

Does it feel like your credit card bills, mortgage payments, or student loans will never stop piling up? It can feel overwhelming at first, but there are multiple proven strategies to help you get debt-free faster.

Start with the 50/30/20 rule

To build an effective plan for tackling your debt, start with a full picture of your finances.

1. Create a list of your debts. Be sure to list the interest rate, balance, and minimum monthly payment for debts. Be sure to record all of your debts, including credit cards, personal loans, student loans, and auto loans.
   

2. Budget your finances. To have more money to pay off your debts, try following the 50/30/20 rule. This widely used budgeting guide can get you back on track, even when your debt feels unmanageable. The bullets below show how to use this method to divide your income into three groups for budgeting:

   -Budget 50% for necessities like food, housing, utilities, childcare, clothing, and minimum loan payments.

   -Set aside 30% for nice-to-have purchases such as travel, entertainment, technology upgrades, luxury items, and dining out.

   -Allocate 20% for debt repayment and savings.
   

   Want to see how much you're spending each month? Use our budgeting tool to stay on top of your finances.
   

3. Use the money you save to pay off your debts. The two most popular repayment strategies are the debt avalanche and snowball methods.

What's the debt avalanche method?

The debt avalanche method is a payment strategy that prioritizes paying off your highest-interest debt while making minimum payments on all your other debts. No matter how much money you owe, this approach can save you the most time and money because you'll be paying less interest in the long run. If two debts have the same interest rate, start tackling the one with the lower balance first.

1. Order your list of debts by interest rate. Start with the highest rate and work your way down to the lowest rate.

2. Start chipping away at your highest-interest debt first. Use any extra money you can find to pay down your highest-interest debt. Every dollar counts. Once you pay off that credit card or other high-interest debt, you'll have more money at the end of the month to put toward the debt with the next-highest interest rate.

3. Work your way down the list until you're debt-free. Repeat the process until you work your way down to your lowest interest debts, like other consumer debt and student loans.

Here's an example of the avalanche method where you have an $800 budget and the following three debts:

Debt #1 Type: Credit Card
Remaining Balance: $11,000
Interest Rate (APR): 20%
Minimum Monthly Payments: $250
Avalanche Priority Rank: 1 (highest interest rate)

Debt #2 Type: Personal Loan
Remaining Balance: $10,000
Interest Rate (APR): 8%
Minimum Monthly Payments: $245
Avalanche Priority Rank: 2 (second highest interest rate)

Debt #3 Type: Student Loan
Remaining Balance: $15,000
Interest Rate (APR): 5.2%
Minimum Monthly Payments: $175
Avalanche Priority Rank: 3 (third highest interest rate)

1. List your debts from highest to lowest interest rates. Set aside money to cover all three of the minimum payments—$250 for the credit card, $245 for the personal loan, and $175 for the student loan.

2. Add the remaining $130 toward the credit card payment for a total of $380 ($130+$250).

3. Once the credit card is paid off, put that $380 towards the personal loan payments, making the new total monthly payment $625 ($245+$380).

4. Once the personal loan is paid off, put the total $800 ($625+$175) toward paying off the student loan.

Following the avalanche approach would save about $6,000 in interest and get you debt-free around four years faster than just making minimum monthly payments!

What's the snowball method, and how does it work?

While the avalanche method is generally the quickest path to becoming debt-free and paying the least interest along the way, many people prefer starting with the snowball method to get quick wins by paying off small debts right away. With the snowball method, begin by paying off your debt with the lowest balance first. Once that's paid off, move to the debt with the next lowest balance and continue the process. The snowball approach can be a more manageable starting point than the avalanche method, especially if you're already stressed out about paying back multiple debts. You can do it!

Here's an example of the snowball method:

With the snowball method, the lowest balance is now ranked first, instead of the highest interest rate with the avalanche method.

Debt #1 Type: Personal Loan
Remaining Balance: $10,000
Interest Rate (APR): 8%
Minimum Monthly Payments: $245
Avalanche Priority Rank: 2 (lowest remaining balance)

Debt #2 Type: Credit Card
Remaining Balance: $11,000
Interest Rate (APR): 20%
Minimum Monthly Payments: $250
Avalanche Priority Rank: 1 (second lowest remaining balance)

Debt #3 Type: Student Loan
Remaining Balance: $15,000
Interest Rate (APR): 5.2%
Minimum Monthly Payments: $175
Avalanche Priority Rank: 3 (third lowest remaining balance)

1. List your debts from lowest to highest balances. Set aside money to cover all three of the the minimum payments—$245 for the personal loan, $250 for the credit card, and $175 for the student loan.

2. Put the remaining $130 toward the personal loan payment, for a total of $375 ($245+$130).

3. Once the personal loan is paid off, put $375 toward the credit card payments, for a total of $625 ($250+$375).

4. Once the credit card is paid off, put the new total of $800 ($625+$175) toward paying off the student loan.

Following the snowball method would save you about $4,600 in interest and get you debt-free around four years faster than just making minimum monthly payments. Now's the time to take control of your finances

It's always best to have a plan. Budget your money. Pick an approach. And start paying off your debts using the avalanche or snowball method. You've got this!