Which Debt Should You Pay First?

man and woman looking at a tablet with bank account statemnts and calculator on a table

Couple going over their debt | Source: iStock

Many people believe that credit card debt is the worst kind of debt. Credit card debt can be a big problem, and this is especially true if you live in one of the 10 cities with the most credit card debt. However, it isn’t always the worst kind of debt, and sometimes, you will have a good reason to pay a different debt off first. You need to take several things into consideration when determining which debt you should pay off first.

What is the worst of your debts is only one part of the equation. You also need to determine which of your debts might be helping build your credit score (or hurting your score), and how the different debts affect your goals, as well as your finances (including your taxes). Here are some things to consider before you rush to pay off your credit card.

Determine which debt is the worst

Credit card debt can be dangerous because of the potentially high interest rates. According to National Debt Relief, the five major kinds of debt include student loan debt, credit card debt, mortgage debt, tax debt, and auto loan debt. If you pay only the minimum balance on your credit card, you may be paying it back for a long time. If you take out a large student loan and you can’t find a job, you might be in trouble. On the other hand, you need to consider which of your debts are secured or unsecured; you might have higher interest on your credit card, but you don’t want to lose your house by neglecting your mortgage debt.

National Debt Relief writes that the worst debt is the debt you can’t pay on time. This is because your credit score can be negatively affected, your balance can grow if you can’t make the payments, and you might need to borrow more money in order to make your payments. This makes perfect sense, and is important to consider when you are deciding which debt is the worst, and which debt you should pay off first. If you can’t pay for your auto bill, that might be your worst debt because without a car you may not be able to commute to work, and then you may lose your job and go into even bigger debt.