If you’re focused on minimizing or eliminating how much you owe, you may be wondering which debt to pay off first. Should credit cards be the priority? Or is paying down personal debt more important? The best way to know which debt to pay first is to assess what you can make as monthly debt payments without compromising your living situation.
The decision to pay down debt is a major one. Figuring out where to start can be overwhelming. The average personal debt owed by Canadians (excluding mortgages) is $20,739. You’re not alone in navigating this! There are good reasons for paying down credit card debt before personal debt and vice versa, but the answer will come down to your financial situation. If you’re not sure which debt to tackle first, we’ve outlined a few different approaches that may work for you.
Organize your debt with interest rates and balances
Determining the most important debt to pay off first comes down to your income, obligations, needs, and goals. Your repayment strategy should not add additional frustrations or stress to your life. Creating a list of all your credit card and personal debts is a great place to start. We recommend including details about the terms and conditions of each debt, interest rates, owed balances, and any other important information. This will help you get a real sense of where you’re at. It doesn’t matter how long the list is. It will help set some direction when it comes to choosing a repayment strategy.
Once you’ve established what you owe, the next step is considering what your monthly budget is. Comparing how much money is coming in to how much money needs to go out can help you select which debt to start with. It also assists in avoiding additional financial issues down the road.
All of the details in your debt list and budget can influence which one you pay first. Once you see it all laid out in front of you, you may realize that prioritizing the largest debt is what you feel most comfortable with, or you may realize that you’d prefer to tackle the one with the highest interest rate. Each person’s circumstance is different, but the process for determining a repayment plan is universal.
To help you visualize your potential options, our debt repayment calculator outlines several repayment methods.
Paying debt by avalanche vs. snowball method
Once you’ve established the list of your credit card and personal debts and how much you can afford to pay, the next step is choosing your repayment approach. There are two main methods, one which focuses on paying the smallest debts first and one which focuses on paying off the highest interest debt first. These are referred to as the debt snowball method and the debt avalanche method.
Your short- and long-term goals will point you to the method that makes sense for you. The avalanche method (high interest first) can allow you to save funds for other financial goals, like paying off student loans. On the other hand, the snowball method (smallest debts first) results in a series of quick wins. It can be motivating to knock off a few debts right away, which reinforces sticking to the strategy.
Regardless of which approach you choose, the most important thing is adhering to a plan and committing to monthly payments, as missed payments can impact your credit score. Your journey to being debt-free will be a lot easier if you resolve to be consistent.
Combine debt repayment methods
When trying to determine which debt to pay first, you can also choose to follow a balanced repayment strategy. Each person has their own needs and capabilities. A combination of the avalanche and snowball methods might be what works best. Emotions play a role in repayment as well. There might be certain debts that weigh on you more than others.
The most important debt to pay off first is the one that is impacting you the most. If one of your main goals is to improve your credit score, then credit cards might be the first debt in your plan. Credit cards tend to have sky-high interest rates. When you pay down credit card debt (and don’t add to the balance), you are boosting the amount of credit you have.
However, if you are prioritizing overall progress and less stress, you may want to start with smaller personal debt balances and work your way up to the bigger ones. As you pay off smaller debts, one at a time, you’ll likely wind up with more money to pay off the bigger debts.
If you’re still feeling frustrated or overwhelmed, consolidating some or all of your personal debts and credit card bills might be another route to take. During consolidation, all debts are rolled into one loan, which has a consistent monthly payment. Some people find this more manageable and choose this option to pay down debt more quickly or have repayment become less of an interruption in their everyday life. For debt consolidation to be a viable option, the interest rate on the consolidation loan must be lower than the average rate of your current debts.
If paying off a credit card is the priority, some people consider taking out a personal loan to do so. Getting a personal loan to pay off a credit card is a form of consolidation. With this strategy, you’ll have one monthly payment on your loan, and although they come with fees, personal loans often have lower interest rates than credit cards.
No two debts are the same and no personal financial situation is the same. A customized repayment plan may be the right approach for you.
Pay off your personal debt
Our team of experts can help you make the decision that works best for you and your family, and help you get your debt under control. Contact us today to create a custom debt repayment plan.