Which debt to pay off first

Anyone with several debts faces the same question, and the two standard answers disagree in a way that is worth understanding.

The two approaches

Highest interest first, sometimes called the avalanche method: pay minimums on everything and direct all surplus at the debt with the highest rate.

This minimises total interest paid and is mathematically optimal.

Smallest balance first, sometimes called the snowball method: pay minimums on everything and direct all surplus at the smallest balance regardless of rate.

This costs more in interest and produces visible wins sooner.

What the evidence says

More interesting than the arithmetic suggests.

Research on debt repayment behaviour has found that people repaying smallest balances first are more likely to persist and to become debt-free, with the sense of progress from closing accounts sustaining motivation.

Which means the mathematically inferior method frequently produces the better real-world outcome, because the optimal plan that is abandoned achieves nothing.

The practical resolution: if the interest rate difference between debts is large, the arithmetic dominates and the highest-rate approach is worth the discipline.

If rates are broadly similar, or if you have abandoned repayment plans before, start with the smallest balance.

A hybrid — clearing one or two small balances first for momentum, then switching to highest rate — captures most of both.

What comes before either

The order that matters more than the method.

Priority debts first, always: rent or mortgage arrears, energy, local taxes, court fines and anything secured on your home or with a risk of losing an essential service.

These carry consequences that unsecured debts do not, regardless of interest rate.

Then a small emergency buffer, since without one the next unexpected expense goes back onto credit and undoes the progress.

A modest amount — enough to cover a car repair or a broken appliance — is sufficient at this stage.

Then any employer pension match, which is generally an immediate return no debt repayment can beat.

Then the highest-cost debts.

The rates that matter

Which are frequently misjudged.

Payday and short-term high-cost credit, which is the most expensive and should be dealt with first.

Overdrafts, which in several markets now carry rates comparable to or higher than credit cards.

Credit cards and store cards.

Personal loans.

Car finance, where the structure matters as much as the rate.

Student loans, which in many countries have terms — income-contingent repayment, write-off periods, interest linked to inflation — that make them behave more like a graduate tax than a debt, and where overpaying is frequently not sensible.

And mortgages, which are typically the cheapest and the last to accelerate.

Reducing the rate

Which is frequently more effective than repaying faster.

Balance transfer offers, where a fee buys a period at zero or low interest — worthwhile only if you can clear it before the promotional period ends, and disciplined about not spending on the card.

Consolidation loans, which simplify and may reduce the rate, and which extend the term and increase total interest if the term lengthens.

Negotiating with the creditor, which works more often than people expect, particularly where you are in difficulty.

Switching an overdraft to a cheaper credit form.

And, where a mortgage exists, considering whether consolidating unsecured debt into it is sensible — which converts unsecured debt into debt secured on your home and extends it over decades, and is generally advised against without proper advice.

The behavioural mechanics

What makes repayment plans stick.

Automate payments on payday so the decision is not made monthly.

Increase the payment rather than the minimum, since minimum payments on credit cards are structured to extend the term enormously.

Keep the payment constant as balances fall rather than reducing it.

Roll each cleared debt's payment into the next, which is the snowball effect that gives the method its name.

Track visibly, since progress you can see sustains the effort.

And close accounts you have cleared where appropriate, though this has credit implications discussed elsewhere on this site.

When the plan is not viable

Recognising it.

If minimum payments exceed what you can pay after essential expenditure, no repayment strategy will work and the correct action is free debt advice.

Formal and informal debt solutions exist in every jurisdiction — arrangements, administration orders, bankruptcy equivalents — with different consequences.

Free regulated debt advice services will explain which apply and will negotiate on your behalf.

Anyone charging a fee for debt management is providing something available free and generally worse.

And seeking advice earlier produces more options, since the situation narrows as arrears accumulate.

General information only, not financial advice. Contact a free regulated debt advice service — equivalent help is available without charge.