Which Debt Should You Tackle First?

The average American carries a lot of debt. In fact, even excluding mortgages, the average amount of personal debt carried by Americans is $38,000. If you are a college graduate, a trade school graduate, or even a college dropout, chances are you have a great deal of student loan debt as well. Student loan debt reached historic highs in 2019. Whatever the source or cause of your debt, you’re probably keeping an eye on your balance sheet and wondering how you can start to chisel away at any debt load you’re currently carrying.

There is a lot of conventional wisdom about how to pay down debt. General advice usually ran along the lines that you should look at the interest rates for all of your debt and start paying anything extra you have on the highest interest loan that you have first as it is the debt costing you the most money. That remains great advice, although there are other approaches to debt management that may be of interest to you.

Another debt repayment school of thought held with refinancing your debt to a lower interest rate. Often this is done with a second mortgage or line of credit. Occasionally people will find a very low-interest credit card and refinance other debt on that. The concept with this method is that you take out a much lower interest loan and pay off your credit cards or other higher interest debt with that lower interest loan.

Because so much of your minimum payment consists of interest rather than a payment toward your principal balance, this method can work well for some people. Of course, this method is dependent on your ability to get a low-interest loan which sometimes isn’t possible for those with large debt loads.

Some people recommend that you look at your lowest loan balance rather than the interest rate and concentrate on paying off that debt first. Once you’ve paid that debt off, this method recommends that you take whatever your minimum payment amount was for that debt and apply it to your next smallest loan amount debt. Then you carry on with this method, applying the money you were spending on minimum payments to each progressive debt until you’ve paid off all the money you owe.

Depending on your personal debt situation, any of these methods for paying down your personal debt load may work best for you. The important thing is to crunch the numbers and to think realistically about what you and your family will be able to afford when it comes to paying more than the minimum payments to service your debts. If you’re not sure which way to turn, consider turning to professionals for debt counseling help, or even running through some online calculators to see if your family should begin to consider bankruptcy as a means of dealing with an excessive debt load. When it comes to personal debt, there are as many solutions as there are debts, and it’s important to find one that works well for you.