Debt Free Blog

There are two schools of thought when it comes to paying off your debt. One says that you should start with the account with the highest interest rate, then move to the next nighest interest rate and the next until you’ve paid everything off. The other says that you should pay off the smallest balance first, moving to the next smallest, etc. Which is the best?

Which is Better?

Basic 7th grade math says that you should pay off the highest interest rate loans first, moving to the next highest interest rate loans. All things being equal, this method will pay off the balance of all loans fastest, and with the least amount of interest being paid.

But as Dave Ramsey says, if we were <em>that</em> good at math we wouldn’t have credit card debt! The truth is that most people try this method and fail. They start making payments and after a few months, feel like they’re not getting anywhere (I know I’ve been there!)

Then after a few months of not seeing much progress they start to slip a little and eventually give up and go back to their old spending habits. It’s no different from breaking any other habit or addiction… you see it with people trying to quit smoking too.

The key according to some financial advisors (including Dave Ramsey) is to pay off the lowest <strong>balance</strong> first, regardless of interest rate. It’s the reassurance of a quick win, they say, that makes you want to keep persevering. Most people have a credit card, loan or other debt that is under $1000. Paying the debt off quickly gives you the motivation to move to the next, and with that much more money per month, the next smallest is easier to payoff.

As each larger debt gets paid off, it’s easier to tackle the next larger one. After freeing up several hundred dollars in payments to smaller debts, a $5,000 loan might not look that hard to pay off.

Which Should You Choose?

Which method you choose is up to you. You may have the perseverence to pay off the highest interest rate debt first, but history and the success of the credit card industry has proven that wrong for the majority.

I will say that from personal experience, it is definitely more encouraging to pay off several small debts in a row rather than chipping away at larger ones. That said, once you’ve gotten a few smaller debts knocked out, I don’t think there is anything wrong with tackling some of the high interest debts.

Do what you are comfortable with and remember, you can always switch it up if it’s not working for you!