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Inside:  Ready to pay off debt, but not sure where to start?  Let’s look at your options!

Medium Sized Family readers, give a welcome to Jacob from Dollar Diligence!  He’s going to give us his perspective on debt today.

A few years ago, I paid off $25,000 of student loan debt in just 15 months. This was a HUGE feat for me and I am so glad that I did it. If I did not, I would still be living in the minimum payment world with a payoff future date of 10 or more years from now. Not what I wanted.

When it comes to debt, whether you have student loans, credit cards, or even an auto loan, you want to make sure that YOU choose what debt is paid off first. If you do not choose, then your money will not be allocated properly and you will remain in debt for longer than you needed to be, which means wasted money in interest payments.

Let’s take a look below at what I would recommend to you when you start to choose what debt to pay off.

So you know you need to get that debt paid off, but which kind of debt should you get rid of first? This post helps you sort it all out.

Avoid Indiscriminately Paying Off Your Debt

One of the biggest mistakes that many people make is that they indiscriminately pay off their debt. What this means is that there is no rhyme or reason to the debt pay off and it just happens. Pretty much like if I have three credit cards and each one has a minimum payment due of $25, then I make that $25 payment per month. Should I have some extra money one month, I toss it to whatever card I choose at that moment.

The reason that this is not a good strategy to follow is because you will find that you never actually make any true progress. If you were to take some time to plan out how to pay off your credit cards, you would be in better shape. For example, if I have those same three cards and each one has a balance of $450, $100, and $310, all with the same interest rate, then you would want to pay down the $450 first to eliminate it since it accumulates the most interest. Remember, interest compounds on your balance.

Aim for the Highest Interest Rate Debt FIRST

Similar to the example above, you want to pay attention to what you do when it comes time to pay off your debt. You should ALWAYS knock out the highest interest rate debt FIRST. Why? Because interest compounds. The more debt you have, the more interest you accumulate. For example, you would accumulate MORE interest on $350 than you would on $130.

Credit cards do have high interest rates, so you should choose to eliminate them first and for good. You can pay up to as much as 25 percent on these cards. Wow! You should start with the highest balance and then work your way down to the smallest balance until all of the debt is paid off.

Student loans through the Department of Education are not as harmful of a debt for you, but you do want to focus on making payments and paying them off. While the interest rate may seem reasonable at 4 to 7 percent, over 10 to 20 years, it is not as nice as it once seemed.

How to Choose Which Type of Debt to Pay Off First

When it comes to student loans, private student loans are the ones you want to focus on and knock out because these types of student loans often come with a higher interest rate and unless you qualify, you may not receive approval to refinance.

If you have a mortgage, you may be wondering just what you need to do with it. Or, maybe you do not have a mortgage and you want to know whether or not it is a good move for you. Here is the low down.

Mortgage rates are usually pretty low and you will likely luck out with a rate somewhere between 3 and 4.5 percent. Since mortgages do carry lower interest rates, they do not accumulate as much interest as you may think. This is good for you and it may be wise for you to apply for and receive a mortgage should you be in a position to want and afford one.

Don’t Delay When It’s Time to Pay

The worst thing you can do is take a backseat approach to your debt, whether it is from student loans, credit cards, or an auto loan. You should be proactive about paying back the money you borrowed, but do make sure you pick and choose where the money goes to maximize your pay off strategy.


Jacob talks about all things money at his personal finance blog Dollar Diligence. You can find him on Twitter for similar content and corny jokes.