September 15, 2021

Which Debt Should You Pay Off First?

No debt is created equally, and in this blog, you'll learn which ones you should prioritize first.

7 min read

Qoins Staff

@qoinsapp

The type of debt you choose to payoff first largely depends on your income and family obligations. Before we go any further, we do have to mention that there really is no "right" way to pay off debt. Some tactics apply to the psychology behind paying off debt like the Snowball method, while others apply towards the greatest savings in interest like the Avalanche method. Regardless of which path or plan you follow, the main message is you're doing a great thing and should keeping doing whatever works for you! Personal finance is personal, so set a plan that is specific to you and most importantly one that you will stick with!

Types of Debt

There are truly only 2 types of debt: secured and unsecured debt. Secured debt is backed by collateral and usually comes with a lower interest rate because of that collateral. What this means is that if you fail to pay for that car or home, the lender is able to take it back. Unsecured debt, like a credit card, is not backed by anything which causes the interest rate on the debt to be much higher. And a quick warning here is that if you fall 30 days behind on payments to an unsecured debt, there will be significant impacts to your credit score and may hurt you from borrowing in the future. So even if you're focusing on paying off one type of debt, you should still be making the required minimum payments on the rest.

Now let's talk about the two most popular debt pay off strategies, the debt snowball and avalanche method.

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Debt Snowball

The debt snowball method is a good strategy if you respond well to small victories and don’t have the patience to tackle the biggest balances first. If you have a few small debts, like a few hundred dollars, you might be able to pay this off in a few weeks or a couple of months! This first win may be the motivation you need to see progress and keep you motivated to build up to the larger balances. While you may be able to save more by paying off debt with the avalanche method, the snowball method plays to the psychological side of finance and money. For example, if you have student loans totaling over $30,000, credit card debt of $9,000, and a car loan for $4,000 using the snowball method you would tackle the car loan first, to get the quick win. Then move to the credit card, and then finish paying off the student loans which would take the most amount of time. When using the avalanche method however, you would first tackle the credit card debt, because those typically carry the highest interest rate, which in turn gives you the most savings if paid off first.

Debt Avalanche

The interest rates you're paying using this method will guide which type of debt you choose to pay off first. For example, a credit card with a high APR will take a longer time to pay off since interest makes up a big chunk of your minimum payments each month.

If you want to tack high interest credit card debt, using the debt avalanche method will save you the most money. With this strategy, you'll pay off the loan or debt with the highest interest rate first while continuing to make minimum payments on all other debts. Once the highest interest rate debt is paid in full, you have more capital to funnel towards the next highest interest debt. The reason it's called an avalanche is that once you've paid off a few debts, you'll see you're paying less in interest per month, which in turn gives you more progress towards your debt pay off. Plus when you continue to knock out minimum payments, your progress towards the end speeds up rapidly. The momentum really picks up with this method, but it can be a tough strategy when your largest debt is also the highest one, which could start your debt-free journey with paying off one debt for 10 months. That's why the debt snowball method is such a crowd pleaser with the quick and easy wins up front.

An example here would be if you had the following three types of debt: $10,000 car loan, $40,000 in credit card debt, and $50,000 in student loans. Credit cards carry the highest interest rates so you would tackle that first, then the car loan, and then the student loans.

Key Takeaways

Personal finance is a very personal endeavor, so you must do what you can stick with. Regardless of which debt you choose to payoff first, or which method you use, you must remember that you're making progress towards a debt-free life and any progress is great progress. And remember that consolidating some of your debt is always an option to save big on interest and minimizing your monthly payments. P.S. Qoins is known for paying off debt 8x faster without ever thinking about it, so download the app and set your debt snowball or avalanche plan there and we'll automate the rest!

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