Drowning in Debt? What to Pay Off First

MAR 07, 2011

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When you’re so deeply in debt that the thought of looking at your credit report sends a chill down your spine, it can be hard to know what bills to pay first. You may even be tempted to just stop paying altogether.

Letting bills slide is a sure way to end up even deeper in debt than before. Paying up is the best policy, but what debt should you tackle first to ensure you make the biggest impact with the money you have?

That depends. Generally, you should pay off high interest credit cards first. Credit card debt is unsecured (meaning you don’t get an asset out of it, like a house or car) and costing you a lot of money every month in interest charges. But a high interest card may not be the debt that has the most detrimental effect on your credit report and credit score.

For instance, if you’ve got a card that’s maxed out, it’s cutting into your ratio of available credit versus credit used – a factor that credit bureaus use to calculate your score. Paying off a lower interest card that’s maxed out may do more to boost your score than paying monthly on high interest debt. If you’re looking to buy a house or car while you’re deeply in debt on credit cards, there may be value in doing something that could improve your credit score.

Another reason to pay off a lower interest card might be if you owe less on it. Eliminating one debt can be a real confidence-builder. Plus, it will increase the available credit that shows up on your credit report. And, it can show potential lenders that you have the credit management skills to pay off a debt.

Finally, when you’re in debt, paying off secured credit, like mortgages or auto loans, should be at the bottom of your list. These debts are generally considered to be “good debt” because you have an asset to show for the debt, and making regular payments over time will help build your credit score.