If you have several debts up to your neck, knowing how to pay them can be a nightmare. Deciding whether to pay the highest interest debt first or the lowest interest debt is not just a decision you’ll wake up and make.
Before choosing which debt to pay, make sure you enter all your outstanding debts, minimum monthly payments, interest rates, and any other fees that come with your debt repayment.
With that in mind, you can now follow this simple guide to determine which debt you should pay off first.
Reasons for Paying off the Highest Interest Debt First
It is hard to pay off credit cards with high-interest rates. Therefore, you should start with the debt that has the highest interest rate and also consider debt consolidation. Start by focusing on repaying your highest interest debt first to get rid of that high-interest debt possibly.
As you keep making minimum monthly payments on your credit cards and loans, also remember to put extra cash to pay off your loan. And don’t forget that this should be the loan that has the highest interest rate. If you feel overwhelmed to pay off your high-interest debt, then don’t hold into it. Turn to other means you think are more comfortable.
How about if that your high-interest debt is also your largest debt? You’ll find it challenging to focus and stick to your financial obligation. You’ll have to take a long period before you pay off your debt. Look for other debt payment methods but ensure you become debt-free while you make progress in settling your debts.
Reasons for Paying off your Smallest Debt First
Your meat can be someone’s poison, so trade well when choosing the best way to pay off your debt. There’s absolute satisfaction you can gain when you pay off your small debts first. Paying off small debts gives you progress satisfaction. That feeling that you’re making steps makes everything fulfilling.
As you knock off your small debts one by one, you’re able to cement your financial goal by becoming debt-free. After you’ve paid these small debts, you’ll have extra money left that you can use to pay off your next largest debt.
These snowball debt payments have a lot of psychological benefits to whoever prefers to use them. The only setback is that you’ll have to pay more interest rate than you would have paid if you’ve decided to settle on the highest interest debt first. But ensuring you pay off those smaller debts as quickly as possible has positive rewards.
It’s easy to get started with the debt snowball. You first have to list all your current debts, plus their current balances, ranging from low to high. Set aside money to start paying your debt from the smallest to the biggest. If you want to get closer to debt freedom, you have to make your debt snowball bigger.
So, Which Debt Should You Pay First?
As you can see, there’s no straightforward answer to this. It all depends on your financial planning methods and what you think can be more fulfilling. But if you have the money, paying off those with higher interests can be a good idea to prevent the high rates from growing.
If you don’t have enough money, start by paying small debts as you progress to the biggest debts to give yourself that feeling of progression.