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Which Debts to Pay Off First?

Allison Kade
Allison Kade
Posted on Mar 25, 2010

quote

Great question! We hear this one a lot.

First, NEVER miss the minimums due on any debt. Then, with the extra you have left, proceed in this order:

Bad Debt Comes First

Start by attacking your bad debt. Simply put, your credit card debt is bad debt, so pay it off as soon as you can. Prioritize the obligations with the highest interest rates. Paying off the highest, most toxic debt will free you up sooner and help you pay less in the long run. Plus, it will take a load off of your mind.

NOTE: Do this in addition to paying your minimums on all bills. Never miss payments for any of your other debt in order to pay off your credit card faster. (Car loans also fall into this pile of bad debt.)

An Emergency Fund Is Your Security Blanket

After you’ve conquered your credit card debt (but before you start paying off more than your regular minimums for student loans), pause, take a breath, and congratulate yourself. Now, make sure that you have a solid emergency fund. You should aim to save up six to nine months’ worth of living expenses. That way, if you lose your job or are hit by a catastrophe, you will feel much more secure. Trust us: This is a security blanket for your peace of mind.

Finish Up With Student Loans and Other Debts

Once you have a solid emergency fund, focus on your student loans (or your mortgage, if you have one). As before, pay off the loans with the highest interest rates first.

Find a Careful Balance

As you go forward, look at your interest rates to decide whether to put your money toward additional savings versus polishing off debt. For example, if you were earning 2% interest from your high-yield savings account but paying 6% interest on your student loans, then it would probably make more sense to finish paying your student debts before funneling your money toward savings.

Though the end of the tunnel might feel far away, you’re on the right track—LearnVest will help you get there!

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  • robin

    my credit card rate is actually about 2 percentage points LOWER than my mortgage…should i still pay it down first? But it’s a 30 year and i’ll never get very far with it…

    curious

  • The LearnVest Staff

    Hi Robin,

    Great question! Even though your credit card rate is lower than your mortgage, you should start by tackling the card debt. The reason for this is because your credit card debt is classified as “bad debt,” whereas your mortgage is theoretically “good debt.” The distinction between the two is that you’re not expecting the stuff you bought with your credit card to go up in value after purchase, whereas the value of your home very likely will increase in value, even as you pay interest on your mortgage. Click here for more info on good v. bad debt.

  • Barbara Bennett

    A suggestions from a mortgage loan underwriter of 22 years: If you have open collections or judgments, try negotiating with the creditor. Have as close to the outstanding amount available as you can and offer them a deal: you will give them cash today if they will ask the credit bureau to remove the negative entry (trade line) on your report. Get it in writing. Espeically in these diffcult financial times when record numbers are filing bankruptcy, the creditor may be willing to settle with you. If you do not get the account removed, it will show as a paid but very bad debt, for 7 years.

    • The LearnVest Staff

      Hi Barbara,

      Thanks for the tip!

  • williamhomolkaCFOAmFinAd

    Congratulations on building this site to help young people with their finances. May I offer my referral to our company's site which offers free shareware for a no cost loan reduction program (the lenders pay servicing fees). All major loans can be accelerated: mortgages, equity loans, consolidation loans, student loans, car loans, even credit card debt, the most toxic loan invented by the banks. We've been doing this for 12 years now. I hope that your readers find this service helpful and use it to end debts, and manage future loans. Thank you, and I wish you all the best.

  • anon

    I'm curious to know why a car loan is “bad debt.” My car loan is fixed at 6%, lower than some of my student loans.

    • ADM

      A car loan is “bad debt” because the car's value will go down.

  • ADM

    A car loan is “bad debt” because the car's value will go down.

  • http://www.web2carz.com/bad-credit-car-loan Bad Credit Car Loans

    House and car always come first IMO. You have to get to work, and you must have a roof over your head, after that move on to paying down revolving, and/or any student loans.

  • http://www.allthingsannuity.com David Wilson

    Thanks for the post, great info.

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    This is the fiojeeoirjo article I have read in a iwjeowehwu

  • http://blog.badcreditwhiz.com/ Bad Credit Mortgage

    The most priority loan should all be paid off so that you loosen your burden a bit.

  • http://blog.badcreditwhiz.com/ Bad Credit Mortgage

    The most priority loan should all be paid off so that you loosen your burden a bit.

  • http://blog.badcreditwhiz.com/ Bad Credit Mortgage

    The most priority loan should all be paid off so that you loosen your burden a bit.

  • http://blog.badcreditwhiz.com/ Bad Credit Mortgage

    The most priority loan should all be paid off so that you loosen your burden a bit.

  • http://blog.badcreditwhiz.com/ Bad Credit Mortgage

    The most priority loan should all be paid off so that you loosen your burden a bit.