How to Prioritize Debt Payments

Paying off debt is a universal struggle - and the problem is only getting worse. According to a 2018 report from Northwestern Mutual, the average American had $38,000 in consumer debt, not including a mortgage.

When you’re deep in debt, it can be hard to see clearly, especially as the bill pile keeps growing, the late fees are accruing and the interest is adding up.

Being in debt can be so overwhelming that deciding how to tackle the problem evades many people. But if you don’t stop and organize your debt, you could risk ruining your credit score, having your belongings repossessed and end up paying more in fees and interest than you originally owed.

Table of Contents

• How to prioritize debts based on your top priority
• What to do if you can’t make all your payments
• Where do student loans fit in?
• Where does medical debt fit in?
• Ways to manage your debt over the long-haul

How to decide which debt is top priority

First, make a list of all your current debts, which may include:

• Mortgage
• Car loan
• Student loan
• Personal loan
• Payday loan
• Title loan
• Credit card balance
• Home equity line of credit
• Business loan

Write down how much you owe, the interest rate, the monthly payment, and if the loan is current, late or in default.

Once you know how much you owe, consider the practical implications of being late. Will the utility company shut off your power? Will the internet company disconnect your internet? Do you owe a lot of money to a friend who’s having financial problems of his own?

__Take a moment to prioritize your debts based on: __

• Your risk of losing something you need
• The cost to your wallet
• Damage to your credit

Let’s take a moment to break these down a little further…

1 - Your risk of losing something you need

If you need something to survive and could risk losing it if you don’t pay, prioritize those payments first. If you rent an apartment or have a mortgage and would lose your shelter if you miss another payment, make sure you pay those bills first.

If you need a car to get to work, don’t risk having your car repossessed by not paying your auto loan and losing your transportation (and possibly job). If you live in a place with a harsh winter, don’t risk having your utilities shut off when you need heat most.

While those are just a few examples, the most important thing is to pay the bills needed for your basic survival (food, shelter, transportation to work) first.

2 - The cost to your wallet

Once you’ve covered your basic living needs, the next step is to prioritize your debts to keep your costs from increasing as much as possible. In other words, figure out what payments to make to keep other charges from stacking up in the meantime.

Late payments can add up because you might owe late fees, interest and penalties. So to keep your debt from growing, try to avoid late fees and payments whenever possible.

When prioritizing your debts this way, make sure you know when exactly a bill counts as late and what late fees are charged. For example, many lenders will not count a payment as late until it’s 15 days late or more. However, your landlord might charge a late fee on your rent check after just 1 day late. Try to plan your debt payments to avoid these fees whenever possible.

Depending on the bill and how late your payment is, late payments could also affect your credit.

3 - The damage to your credit

Once you’ve prioritized your debt payments based on preventing loss and reducing fees and fines as much as possible, the next step is to worry about your credit.

Yes, this blog is written on behalf of a company (Self) that sells products that help you build credit. And yes, we really are telling you not to make your credit score your first priority if you have more pressing financial concerns to take care of first.

Often, the behaviors and habits that lead to positive financial health can lead to healthy credit too. Remember that, while it’s not always ideal, your credit score can usually recover later and there are tools to help you build credit again in the future.

Ultimately, your financial health comes first.

What to do if you can’t make all your payments

The best thing to do is contact your lender or bill provider directly and explain the situation. Ignoring your bills won’t endear you to those companies. If you’re late on your rent, contact the landlord and explain the situation.

Being evicted can lead to serious problems, such as not being able to find another place to live. Moving is also expensive and if you can’t afford your rent, you definitely can’t afford a security deposit.

If you have a mortgage, you generally have to be delinquent for 120 days before the bank will start the foreclosure process.

If you have any supporting reasons, make sure to have documentation. This can include a job loss, a surprise surgery or a child’s illness. Having proof that you had something happen to you can matter to a lender.

You can also contact any local nonprofits you’ve worked with before or your local United Way. They may know of financial support services you can use during this time.

Where do student loans fit in?

If you’re struggling to meet your student loan payments, contact your lender to find out your options. Some lenders may offer a temporary grace period or have a hardship program.

If you have federal student loans, you can apply for deferment or forbearance. These programs let you pause debt payments because of hardship, medical issues or because you’re going back to grad school.

You may still accrue interest while your loans are deferred so don’t stay on this program unless you’re about to default.

If you have private student loans, you should still call them and ask what your options are. It’s best to do this before you’ve made a late payment, as some companies can only work with borrowers who are in good standing.

Where does medical debt fit in?

While medical debt might not top your list of debts to pay first, there are a few things you need to keep in mind.

First, unless it goes to collections, medical debt doesn’t impact your credit or count towards your credit score. Second, unlike credit card debt, it doesn’t accrue interest.

However, that doesn’t mean you should ignore it. If you don’t pay, medical debt can get sent to collections, which could hurt your credit.

To get it out of the way, many people put medical debt on their credit card, then carry a balance and pay down that debt over time. But that just means you took debt that does not accrue interest and added credit card interest on top.

Unless you can pay your credit card balance off immediately, don’t put no-interest debt on an interest-charging credit card.

In most cases, your provider (doctor, hospital, etc) is willing to work with you to set up a payment plan. Some providers will even base your payments on your income.

So if you’re worried about not paying your medical bills, call your provider and talk to them about your options. You might have to provide proof of income, bank statements, or other financial documents to make your case, but they’re usually willing to work with you.

Managing your debt over the long haul

Here are a few popular and practical ways to tackle your debt over the long-haul.

Debt avalanche

The debt avalanche method says you should repay debt in order from highest interest rate to lowest interest rate. This strategy will save you the most on total interest paid and makes the most sense mathematically.

To apply this method:

1. Organize your debt by interest rate.
2. See how much extra money you have each month. Apply those funds to the loan with the highest rate.
3. Once you pay the loan with the highest interest rate off, add the money to the loan with the second-highest interest rate.

This method is especially good to follow if you have high-interest debt from payday loans or credit cards. You could waste hundreds of dollars on interest if you don’t prioritize high-interest debt first.

Debt snowball

The debt snowball method says you should pay off your debt from smallest balance to largest balance, no matter the interest rate or type of debt.

Here’s how it works in two basic steps:

1. If you have an extra $50 to pay toward your debt, put it toward the smallest loan.
2. When that loan is paid off, add the amount you were paying to the next smallest loan.

This method rewards people because they pay off individual debts faster than if they were attempting the debt avalanche method.

The debt snowball method was popularized by personal finance guru Dave Ramsey, but research has also confirmed that it’s more effective than the debt avalanche method. Research from Northwestern University’s Kellogg School of Business found that people who focused on smaller debts first paid off more in the long run.

If you’re interested in this method, organize your list of debt from smallest balance to largest. Decide how much extra money you have to throw at your debts. Even an extra $5 or $10 counts.

Start making extra payments on the smallest loan while paying the minimum on all the other loans. Once the smallest loan is paid off, take that monthly amount and add it to the next smallest loan.

Ask for a lower interest rate

If credit card debt is the problem, another option you can try is to ask for a lower Annual Percentage Rate (APR). This is a tactic particularly recommended by bestselling personal finance author Ramit Sethi in his book I Will Teach You to be Rich.

Though Sethi recommends you tell, don’t ask. For example, tell your card issuer you’re trying to pay off your credit card debt more aggressively and would like a lower APR. If they say no, tell them about the lower rates you’re being offered from other card issuers.

While there’s no guarantee that your credit card issuer will go for this, you’d be surprised how some can be willing to work with you if you just call and ask.

Even just lowering this interest rate by 1-2% could reduce what you owe by thousands of dollars over the years.

Build an emergency fund

Life has its complications, no matter how hard we try to keep everything running smoothly. Cars break down, kids get sick and pets need to go to the vet. Emergencies happen, and they’re often why people get stuck in a debt cycle.

Once you have some breathing room in your budget, focus on building a basic $1,000 emergency fund. That $1,000 could cover a new set of tires, getting your drains unclogged or a visit to urgent care.

If you have to use your emergency fund, try to rebuild it as soon as possible. No one can predict when you’ll need it.

Once you have a $1,000 emergency fund, see if you can save between three to six month’s worth of expenses. This larger emergency fund could keep you afloat if you lose your job, wind up in the hospital or have to take care of a sick parent.

Keep the emergency fund somewhere liquid like a savings account, but consider using a different bank than your regular everyday checking account.

You don’t want to use your emergency fund for anything other than a true emergency.

Budgeting

When you have a low income, tracking your expenses is key to staying above water. If you don’t know how much you’re spending on utilities or groceries, you can’t make changes to save money and pay off debt.

First, go through last month’s checking account and credit card statements. If you’re handy with Excel, you can export your expenses to an Excel or Google spreadsheet.

Divide up your expenses by categories, which can include:

• Housing
• Transportation, including gas, car insurance, public transportation, parking, etc.
• Groceries
• Utilities
• Internet
• Childcare
• Health insurance and medical bills
• Eating out and restaurants
• Entertainment including movie tickets, streaming services, concerts, etc.
• Debt payments

Sound too complicated? Try a budgeting app or a financial app that can help keep you on track.

No matter which option you choose, see how much you’re spending in each category and compare the total to your take-home pay or how much you earn after taxes and payroll deductions.

Are you spending more than you’re earning or is there some breathing room?

Try creating a budget that focuses more on saving and debt payoff. See where you can make some changes. Can you shop around for a new car insurance or cell phone provider? Can you buy less meat at the grocery store? Would going zero-waste help?

You’d be surprised what small changes can add up to a big budget difference.

Following a budget is difficult, especially if you’re new to it. Give yourself a break if you keep going over budget and don’t be afraid to revise the budget if your expenses change.

Debt consolidation

Debt consolidation refers to taking all your individual debt and rolling it over into one loan. When people talk about consolidating their debt, they do it because they can get a lower overall interest rate or a lower monthly payment.

Sometimes people consolidate debt because it’s hard to keep track of different payments and due dates.

One common type of debt consolidation is rolling over your current credit card balances onto one card with a lower interest rate. Some cards offer 0% APR for balance transfers for a certain amount of time. If you repay your credit card balance before that 0% APR expires, you could save hundreds or thousands on interest.

Some people consolidate their student loans into one loan with a private lender. This strategy can be good if you qualify for a lower interest rate, but can be dangerous if you give up the protections and benefits of a federal student loan.

Before consolidating your debt, look at the new interest rate, fees, monthly payment and how much you’ll end up paying overall. Make sure that you’re not signing up for more fees in the long run.

Final thoughts

Ultimately, paying down your debts comes down to knowing your options, deciding your priorities and determining the debt payment plan that works best for you and your situation.

About the author

Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings.

Zina Kumok contributed to this article. Zina is a personal finance writer with a focus on budgeting and debt elimination. Her work has appeared in publications as diverse as Forbes, Mint and LendingTree.