What debt to pay off first?

By Lucy Lazarony


You've charged it up -- now it's pay-down time.

If you're up to your eyeballs in credit card and other debt, paying the minimums and little else, it's time to get serious.

The best way to get rid of debt, experts agree, is to attack the balance with the highest annual percentage rate first. When that one is paid off, move onto the debt with the next-highest interest rate.

But always attack that high-interest debt first. On that debt, you want to "double, triple, quadruple minimum payments," says Howard S. Dvorkin, president and founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. "When you're done with that one, move on to the next one."

Linda Sherry, editorial director with Consumer Action, a consumer advocacy group in San Francisco, agrees: Size up bills by interest rates rather than the amount of the balance.

"The amount you owe doesn't really matter when you're paying an enormous amount of interest," Sherry said. "Try to pay the highest interest rate ones first. Muster all the funds available and get the debt out of your life."

An alternative plan -- littlest first

What about knocking off some low-balance bills first and eliminating a bill or two from that thick monthly pile? Experts respond: Go ahead, especially if it will give you the boost you need to stick with a pay-down plan.

"It makes better financial sense to pay down the highest interest rate first. But people get discouraged. So they knock down lower balances first," says Steve Rhode, co-founder of the nonprofit financial services organization Myvesta. "It's a lot more gratifying for some people to pay off the smaller balances within a couple months. (They) feel like they're making more progress."

But once those smaller balances are gone, he says, go back to Plan A: Take the money that had been set aside to pay those bills and apply it to the balance with the highest interest rate.


"Muster all the funds available and get the debt out of your life," Rhode says.

Stick to your plan

The key to an effective pay-down plan is sticking with it. Don't let up on the monthly payments as the credit cards' minimum payments inch down and as bills get paid off.

"Once you establish a payment plan with a credit card bill, stick with the payments until it's gone and then roll it into another credit card and keep going," says Christine Jones, a counselor with American Credit Counseling Service in Melbourne, Fla. Unfortunately, many people quit before they get started.

"The problem I see is that people make mental promises to themselves that they can't keep," says the DCA's Rhode. "They say they will pay $100 a month but it's too big a stretch. They can't do it and then they forget about it."

Think before you act

To avoid falling into that trap, take a hard look at your finances and determine how much you can realistically afford to pay each month. Rhode suggests that people track their spending every day for a month to get a firm handle on where their money is actually going.

"People will save 20 percent just writing down where their money goes," he says. "Because they will start cutting back."

After tracking their spending, people can better decide how much they can afford to pay toward credit card debt. Experts point out that just $50 more a month can make a big difference.

If logging expenses for a month doesn't turn up additional money try these tips for saving $50 a month from Consumer Credit Counseling Service:


•Brown bag 10 lunches per month.

•Have movies and popcorn at home instead of going out.

•Use coupons for groceries and buy store brands.

•Make pizza at home instead of ordering out.

•Buy in bulk and freeze dinner entrees.

•Give handmade cards and gifts.

•Shop at consignment, thrift and discount stores.

Pay more than the minimum

Once you start paying more than the minimum, the debts start to disappear. Paying just the $60 minimum payment on a $3,000 credit card balance would take eight years to pay off and cost a person a whopping $2,780 in interest. By paying an additional $50 a month, the debt would be paid off in three years and they would be spared $1,800 in interest charges. Use Bankrate.com's credit card minimum payment calculator to see how increasing your payments will cut your time in debt.

It is also important to keep in mind that debt is not always bad.

"Having a certain amount of credit balance is not negative," Consumer Action's Sherry says. "Some debt is necessary to reach goals."

But most experts recommend that debt payments including car payments and credit cards eat up no more than 10 to 15 percent of income. More could spell trouble.

"If you can only afford the minimum payments each month, you're on the edge. If you have to hope and pray that your deposit gets to the bank to cover your checks. And especially if you're using the cash advance on a credit card to pay other cards or for routine living expenses," Rhode said. "They're spending money they don't have."