What debt to pay off first?

There are two ways to approach paying off your debt.

Snowball Debt Approach

This approach requires that you pay all the minimums on all your debts except for one (usually the smallest one).  Every month, you pay the absolute highest amount possible until it’s gone.  Once you’ve paid off the first debt, you take whatever you were paying on that debt and put it toward your next target (along with the minimal payment it used to have).

Once you pay off the second debt, you move onto the third debt where you pay the first minimum payment, plus the second and third minimum payments in addition to any extra you can handle.

This method is called the snowball approach because the amount you’re paying into each debt continues to grow (like a snowball) after each new debt is paid off.  For example, if you had six credit card payments all with a minimum payment of $100 a month, plus another $200 a month you could pay towards them ($800 total a month), you’d start the snowball approach by paying $300 toward one debt.  Once that was paid off, you’d pay $400 on the next debt, then $500 when that’s paid off, etc.

Mathematically Speaking

While it sounds like a good approach, not all financial advisers believe that it’s the best way to pay off your debts.  While the snowball approach is good because it keeps you motivated as you keep seeing credit card accounts hit $0 owed, mathematically speaking it makes sense to concentrate on paying off the cards with the higher interest rates first.

When it comes to paying the higher interest rate first, you also have to consider the balance on these cards.  You may have a card with an APR of 29% and a balance of $900, but you also might have a card with an APR of 27% and a balance of $3,000 — obviously, paying the higher interest rate off first would be more costly.