Which debt should I pay off first?

Pay the minimum on every debt, then send every spare unit to one target. If you want to pay the least interest, target the highest interest rate first (the avalanche). If you need early wins to stay motivated, target the smallest balance first (the snowball). The US Consumer Financial Protection Bureau presents both as reasonable; the best method is the one you will keep going with.

The two methods

• Avalanche. Order debts by interest rate, highest first. Each unit repaid removes the most expensive borrowing, so total interest is lowest and you are usually debt-free soonest.
• Snowball. Order debts by balance, smallest first. When one is cleared, its payment rolls into the next. It usually costs more interest, but you close accounts sooner.

The snowball has evidence behind it, not just enthusiasm. Gal and McShane (2012) studied about 6,000 people repaying credit card debt through a debt settlement programme and found that closing individual accounts, whatever their balance, predicted eliminating the whole debt. The avalanche is the arithmetically cheaper route; the snowball may be the one more people finish.

Where the rule bends

• Low-rate debt may not need to be rushed. A mortgage or a subsidised student loan charging less than a balanced portfolio might earn can be repaid on schedule while you invest. See paying off a mortgage early or investing.
• Tax can change the real rate. Where interest is tax-deductible, the after-tax cost is lower than the headline rate.
• Penalty rates and fees come first. A debt about to jump to a penalty rate, or in arrears, outranks one that is merely expensive.
• Keep a small buffer. Without one, the next surprise goes straight back on a card.

Consolidation and balance transfers

Moving several debts into one cheaper loan, or a card balance to a low promotional rate, can help, but only if the total cost really falls. Check the transfer or arrangement fee, the rate once any promotional period ends, and whether a longer term means paying more interest overall. Consolidation that frees up credit cards which are then used again leaves you worse off.

Common mistakes

• Splitting extra money evenly across all debts, which slows every one of them.
• Investing while carrying a card balance; the SEC notes that virtually no investment keeps pace with an 18% interest charge.
• Paying off low-rate debt with the emergency fund, then borrowing expensively when something goes wrong.

In Nivritee

You do not need to know a loan’s interest rate. Under Liabilities, enter what is Outstanding today, the Payment amount, How often and Years left, and Nivritee works the rate out from your own schedule. The What you owe card then shows your Costliest rate, and the Clear the costliest loan lever on the Overview projects what paying it off from your savings would change. See how to enter a loan.