Two ways to pay off debt, and how to choose
If you owe on more than one card or loan, you'll pay every minimum each month. The question is where any extra money goes. There are two well-known answers.
Smallest balance first
List your debts from the smallest balance to the largest. Pay the minimum on all of them, and put every extra dollar on the smallest. When it's gone, add its payment to the next one, and keep going. Each payment you free up rolls into the next debt, so the amount you're throwing at the debt grows as you go.
Why people choose it: you clear whole debts quickly. Each account closed is visible progress, and for many people that's what keeps them going.
Highest interest rate first
List your debts from the highest interest rate to the lowest, and send the extra money to the most expensive debt first. The payment still rolls from one debt to the next as each is cleared.
Why people choose it: it pays the least total interest, and usually finishes a little sooner. It's the mathematically cheapest order.
How big is the difference?
Often smaller than people expect, especially when the debts have similar rates. It grows when one large debt has a much higher rate than the rest. The difference between the two methods almost always matters less than the difference between having a plan and not having one.
Choose the method you'll still be following in month ten. A plan you stick to beats a perfect plan you abandon.
Getting started
- List every debt with its balance, interest rate and minimum payment. Your statements have all three.
- Decide on a fixed extra amount you can add each month, even if it's small, and automate it.
- Stop adding to the balances while you pay them down, or the plan can't work.
Our Debt Payoff Planner sorts your debts either way with one click, so you can compare the two orders side by side.
This guide is general personal finance education, not tax, legal or investment advice. Rules and figures can change, and your situation may differ.