How to Prioritize Your Debts for Payoff

Payoff Debt Priority

How do you prioritize your debts for payoff?

Too much debt?

Do you feel like you have too much debt?

I do (see my list of debt reduction goals). Many people I know feel like they have too much debt.

On the other hand, maybe you’re somewhat comfortable with the amount of debt you have but you’re just ready to experience the peace of mind that comes from being completely debt free.

I’ve found that once you’ve decided to pay off your debts, doing so can be an overwhelming experience at first glance.  Let’s look at some actions steps you can take today to simplify the process, prioritize those debts, and get them paid off quickly.

Get Organized

First, break out your latest debt statements.  For most people in debt, this will be auto loans, student loans, and credit cards.  This may also include personal loans, payday loans, medical bills, and tax bills.

Another thing you can do is download a month of your bank transactions from your bank.  This may remind you of any debts you are forgetting.  Having all of this out in front of you will (1) give you the full picture of your debt situation, and (2) motivate you to want to rid yourself of some of these monthly payments.

For more organization tips, visit the “organize” category, or simply subscribe to PT Money today and never miss another article.

Make a List of Your Debts

Next, it’s best to create a list of all your debts and include the following categories: name, total amount, due date, interest rate (including future rate changes), and minimum payment.  You can use a simple pen and paper or upgrade to a spreadsheet (which makes sorting easier).

Either way, just make sure you get ALL of your debts listed out and include all the relevant information.

Prioritize the Debts

Lastly, you’ll want to prioritize your debts for payoff.  There are a couple of schools of thought on this one.  Some people like to use the interest rate  on the debt to prioritize their list (payoff highest interest first).  Others like to use the total balance of the debt, paying off the smallest debt first (this is the Dave Ramsey “snowball” way).

The former is better from a strictly numbers perspective.  The latter may be better for motivation sake.

Decide which is right for you and rank your debts accordingly.  The debt that ends up #1 on your list according to your ranking, will be the first debt you payoff.  This will be the debt that you put all of your extra money towards.

After this one is completely paid off, move to #2, and so on until all debts are paid off.

Stay Motivated to Pay of Your Debts

Once you have your debt payoff priority, put your list (now ranked by payoff) somewhere where you will see it on a daily basis.  I like to stick mine on the fridge.  I’ve also placed my list in my car’s dash and on my bedside table.

The point is to keep the list somewhere you will look at it daily.

Do you have your debts prioritized?  If so, how did you do it?  What factor did you use?

Photo by redvers

Share Button



Last Edited: December 8, 2011 @ 11:36 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

23 comments
Polly Poorhouse
Polly Poorhouse

Different priorities apply for different economic situations. Trying to pay down debt is different than trying to allocate payments when you don't have enough to go around, like we did after a recent bought of unemployment. In that case, we prioritized:

1) Mortgage
2) Mortgage 2
3) Auto loan
4) Credit cards with a universal default clause or where a late payment would drive up an interest rate
5) Utility bills--usually no late penalties and a several month grace period before they threaten to shut you off.
6) Anybody else

Now that we're able to meet our monthly obligations, at least with the minimum payments, my priorities for any extra (debt-reduction) payments are.

1) Credit cards with super high rates
2) Local payees we know (dance and piano teachers, for example)
3) Other credit cards.

I'd put my mortgage or any tax deductible interest like that on business loans at the very bottom of the list for prepaying.

Other than the local people we know, we prioritize based on interest rates.

Christopher
Christopher

You're welcome. That debt calculator has helped me and I'm certain it can help your readers.

PT
PT

That's pretty neat, Christopher. Thanks for sharing. Nice freebie.

Christopher
Christopher

I came across this debt calculator. It has some nice variables to see if its best to pay off the highest interest first, or the smallest balance, or some other variable. Good luck!

bunny
bunny

Wooo.. reminds me that I still have to pay of my student loan :P

PT
PT

@Rachel - Thanks. I wish I was in your shoes. We have more than we want, but are working toward being rid of it.

Rachel
Rachel

This is great advice. We don't have a ton of debt outside of our mortgages, so I just keep track of it in my head. We usually pay off the few cards we have each month to avoid interest. :)

PT
PT

Thanks for your comments everyone. Seems there are a lot of passionate debt-reducers out there. Keep it up.

Christine
Christine

I am paying off my debt the Dave Ramsey way. I have all of my debts lined up from smallest to largest. I am paying them off that way with the snowball effect.

sara l
sara l

Technically I'm doing my debts in balance order. My car loans are about half of my student loans. The more important factor for me was choosing the loan that doesn't have tax deductible interest.

Jeroth
Jeroth

Thanks for the post!

I use the DR method to prioritize my debts. I know that in the long run it would work out less expensive to pay the larger, higher interest debts first, but it works for me. Every time I clear a debt, it spurs me on to succeed with the next one.

dm
dm

Just wanted to add that you should always prioritize your debts in order of the consequences of not paying them back. In the very worst cases, where you simply cannot make all your payments, you need to make sure that you are paying your mortgage/rent, electric & gas bills, any tax you may owe...etc. These must be your priority!

Once these are covered, then yes, it is up to the individual as to how the prioritize their 'unsecured debts'.

Thanks for your post!

Melissa
Melissa

Great post on debt. We were pretty boring when it came to paying off all our stuff. First the credit cards (highest interest first), student loan, mortgage. We've only gotten through the credit cards (about $38000 later) and are working on the student loan. We also have a car lease that we have to make a decision on soon. Whew!

Laura
Laura

Fantastic post PT! Having 13.75% rate on a car loan is enough motivation for me to try and knock it down as much as possible. :P

Bill
Bill

Great post! One thing I'd add, and I may have missed it, is to try to negotiate better rates with your creditors and/or move balances from higher to lower rates if possible. It's like getting a discount -- you probably won't get one unless you ask.

Thanks for the great ideas.

PT
PT

@Shanti - Thanks for the comment. Glad you liked it. I agree with you (and Jesse above)...it takes a mix of approaches to get it all done.

Shanti @ Antishay
Shanti @ Antishay

@ Fielding
Hahahaa! That's great. I love the box that says "3" on it :)

Shanti @ Antishay
Shanti @ Antishay

This is a really great post! I started out with highest-interest (a la Automatic Millionaire) but after a year of feeling defeated, started paying off all the little ones one by one. Paying off the highest interest ones first was a good plan to start off with, but I was able to negotiate the higher interest ones down after a few months and once all my debts were at an even interest rate, I started paying off the smaller ones. I am now THIS close to being DEBT FREE!!! And I can say that moth plans worked for their own reasons. And it is perfectly fine to switch halfway - or switch every five months, whatever ;)

PT
PT

@ Mark - Thanks for sharing your stats. Good luck to you on your debt-reduction efforts.

Mark Krusen
Mark Krusen

We have only one credit card with about $3,000 on it. The killer for us is a $460.00 car payment with 41/2 years left on it. I hope to tackle that debt with a vengeance soon.

Jesse
Jesse

I like the mixed approach: higher interest if possible, but if there are small things to be paid off within a month or two: nail them first. Not just for "ease" but its also one less thing to WORRY about each month.

Fielding J. Hurst
Fielding J. Hurst

And use this tool if you have credit card collectors hounding you. Just pull up the soundboard, set the phone beside the phone speaker, and let Dave confound and confuse scumbag collector.

PT
PT

@Fielding - that's pretty funny.