Which Debt to Pay Off First (and Why the Order Matters More Than the Amount)

When debt is the thing weighing on your budget, the question isn't whether to pay it down. It's which balance to attack first. Pick the wrong order and you can make every payment on time for a year and still feel like you're getting nowhere.

There are two defensible ways to order your debts, and they solve different problems:

• Highest interest rate first (avalanche). This saves you the most money over time. If your balances are mostly credit cards or anything above roughly 15 to 20 percent interest, this is usually the right call. That interest is working against you faster than almost anything else in your budget.
• Smallest balance first (snowball). This saves you the most motivation. If you've tried to pay down debt before and lost steam partway through, clearing a small balance completely in the next month or two can be worth more than the extra interest it costs you, simply because finishing something builds the momentum to keep going.

Either way, the mechanics are the same: keep making the minimum payment on everything else, and send every extra dollar you can find to the one balance you've picked. Once it's gone, that payment (minimum plus whatever extra you were adding) rolls onto the next balance. The payments get bigger as the list gets shorter, which is why this accelerates faster than it looks like it will at the start.

One more thing worth checking before you lock in an order: if you're only making minimum payments on a high-interest card, ask whether a balance transfer or a lower-rate consolidation loan is realistically available to you. That's not a step to take without thinking it through, but on a card above 20 percent, it can be worth more than any amount of extra belt-tightening.

The first real step is small: list every debt with its balance, interest rate, and minimum payment in one place. Most people have never seen all of it side by side, and that one list is usually what makes the order obvious.