Finances & Money

How To Prioritize Multiple Monthly Debt Payments

Like most Americans, we have multiple debt payments to make every month. Typically, these payments include student debt, credit card balances, medical bills and automotive loans. If you are a homeowner, then you might have a mortgage as well. If you are in a similar situation, individuals in debt can have a hard time deciding what debts to pay first. In order to get out of debt, you need to have a plan and strategy that works for you. To help you decide what debts to pay off, I have listed some of the best ways to prioritize your monthly debts.

Good Debt vs Bad Debt

Firstly, everyone should prioritize debt based on the types of debt you are dealing with. There are certain debts that are considered “good” while other types of debt are “bad” in comparison. The main difference between good and bad debt is how the money works for you. For example, a student loan or home mortgage is an investment that can benefit you and your family financially in the long term. On the other hand, financing a vacation on a credit card would be considered bad debt. These are the consumer spending or financially irresponsible choices made while you’re young. Bad debt usually costs more in interest and since it doesn’t add value to your life, you can prioritize this debt first.

Snowball Debt Payments

Using the snow ball method, debtors prioritize paying off the lowest balance first. This will effectively increase your cash flow per month. As you pay down the lowest balances first, that is one less minimum payment that you have to make. Then, you can take that money, creating a debt snowball, and apply it to the next largest balance. Eventually, when you reach the largest balance, you will have more money to pay it off with. This method works for people who get motivated by paying off credit cards and celebrating little wins along the way. However, you could end up paying more interest if your larger balances are kept at higher rates.

Avalanche Debt Payments

Alternatively, borrowers can prioritize the debts that have the highest interest rate. This would result in the least interest paid on your debts. However, it can be very tough to stay motivated if you have a larger debt on higher interest. You need to have a disciplined approach to take control of your debt. In many scenarios, the difference in time and interest is quite small compared to the snowball debt payments. In other scenarios, using this method to pay down debt could result in over $1,000 of interest payments. If you are a disciplined and motivated to get out of debt, this method could save you the most money.

Credit Score Boosting Payments

Less commonly used, some individuals will pay down debt by prioritizing their balance limit. This is an effective strategy if you would like to improve your credit score quickly. There are many ways that increasing your credit score can help you get out of debt. It would allow you to get more 0% credit offers or qualify for refinancing. These factors could accelerate your debt repayment process by giving you courses of actions when in debt. If you are trying to increase your credit score, you can prioritize debts with the highest level of credit utilization. This gives your flexibility to take smart financial steps and improve your overall debt standing.

Balanced Debt Payments

Of course, you can prioritize your debt payments with a balanced approach. Instead of picking one strategy over another, you can pay off debts that you prefer. For example, you can pay off some smaller debts and then stick to high interest debts. Or, you can focus on boosting your credit score before using the snowball method. Everyone’s situation is unique. Most importantly, your motivations are unique too. If you can find a balanced debt payment plan that keeps your motivated, you should consider this strategy.

It is crucial to prioritize your debt in a way that works for you and your financial situation. The key to getting out of debt is continuously making payments and staying motivated. If you are consistent about paying down your debt, all of these methods will work. It’s just a matter of finding which one will work for you and your types of debt. Pay attention to good debt and bad debt. Consider if snowball, avalanche, credit score or balanced payments will motivate you. Then, once you come up with a plan to prioritize your debt, stick with it and continue to make those payments.


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Susan Paige

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