How To Target Your Worst Debt

Paying off debt is a worthy goal, and doing it in a timely manner matters.

However, once you decide that you are ready to start paying off debt, you have more decisions to make: Which debt should be paid off first?

The way you order your debts can have an impact on how much interest you ultimately pay, as well as how quickly you get out of debt. Here are some factors to consider when deciding how to order your debt pay-off schedule:

High-Interest Debt

One of the biggest considerations in ordering your debt is the interest rate. High-interest rate debt costs more money over time as you pay for the privilege of borrowing the money. Trent Hamm, the well known personal finance blogger at The Simple Dollar, points out that high-interest debt should be tackled first: “[L]ist all of your remaining debts in order of interest rate, with the highest rate first. Then throw everything you can at the highest interest rate debt,” he writes.

By getting rid of the debt with the highest interest rate first, you are reducing the biggest money waster. You can move on to the lower interest debt (which is harming you at a slower rate) when you have eliminated the high interest debt.

Variable-Interest Debt

Another consideration in your debt pay-off plan is whether or not the interest rate is variable. A variable interest rate can change on you with no warning, suddenly heading higher and costing you more. Fixed-rate debt, on the other hand, normally has a limited term; you also know exactly how much is going to interest from month to month. It is usually a good idea to pay off variable rate debt before attacking fixed rate debt. Eliminate the uncertainty first.