Paying off debt is one of the most common financial goals. From car loans and mortgages to student loans and credit card debt, many people have a variety of debt. So which types of debt should be paid off first?
The good news is, you have options. There are different strategies to paying off debt, so take time to consider which plan makes the most sense for your needs.
Should I Pay Off High Interest Debts First?
High interest rates can cost you more money. So the main benefit of paying off high interest rate debts first is potential savings. If saving money over time is your main goal, this might be the strategy for you.
Keep in mind that if your highest interest rate debt is also your largest debt, it could take more time to pay it off. So if you want to get out of debt in a faster timeline, you might consider an alternate strategy.
Should I Pay Off Smaller Debts First?
If your goal is to pay off as many debts as possible in a faster time, starting with smaller debts might be a smart choice. This can allow you to see the gains over time as you journey toward becoming debt-free.
Remember, focusing on smaller debts might mean that some of your higher interest rate debts continue. So though you might reach your overall goal of being debt-free faster, you could also pay more overall interest over time.
Consider Which Debts have Tax Breaks
Certain debts, like student loans, can come with tax breaks. This means that you may be able to deduct some of the interest you pay on these loans when you file your taxes.
Keep this in mind when deciding when you want to focus on this particular debt. Depending on your goals, it might make sense to wait a little longer to pay off debts that include tax breaks.
Look for Opportunities to Save More Money
As you are working on paying off debts, keep your eyes opened for opportunities to save money. For example, if you have a credit card with a high interest rate, you could transfer the balance to a card with a lower interest rate.
Another option that could save you money over time is through refinancing your auto loan or mortgage. If you are currently paying high interest rates that you would like to decrease, refinancing for a lower rate could help.
If you are struggling to create an action plan to tackle your budget, see if your financial institution offers free debt and budget coaching to help you find a system that works for you.