Where to Start When You’re Paying Down Debt

Debt comes in all shapes and sizes these days, but one thing is always true… it’s stressful even knowing that you have debt hanging around. It’s like a weight you carry with you everywhere and often we don’t realize just how stressful it is until it’s gone. So how do we vanquish debt forever? Where do you even start?

In the musical words of Maria in the Sound of Music, “Let’s start at the very beginning, a very good place to start.” I define the beginning as taking inventory of your debt, or in other words, actually write out a list of all of the debt you have and how much that debt is costing you (i.e. interest rates, minimum payments, etc.). You can use our free Debt Tracker Template to help you get started. It will also have you separate your debts between credit card debt, education loans, and loans associated with property you own such as car loans and home mortgages.

Start with Your Credit Card Debt or Any Other High Interest Loans

There are two schools of thought when it comes to credit card debt and honestly I’m a big believer that knowing yourself and your money habits is the best way to determine which one you should subscribe to. The first method is to pay down the credit card with the highest interest rate first. Mathematically, this makes the most sense since the longer your high interest debt is outstanding the higher your total interest payments will be. On the other hand, Dave Ramsey’s snowball approach may work better for you if you need to see results quickly. Using the snowball approach, you’ll start with the smallest credit card balance and concentrate your payments on that debt until you pay it off. Once you’ve finished paying off that balance, you’ll put the monthly payment amount from the first balance you were paying off towards paying down the next smallest balance.

If you’re not sure exactly which approach works best for you, take our Personal Financial Philosophy Quiz. If you are a Financial Rebel or Financial Extremist, the snowball method may work better for you. Conversely, Financial Conservatives and Pragmatists tend to fare better with the high interest method.

No matter what your debt repayment plan is, make sure that you are at least making timely minimum payments on your credit cards every month. I typically recommend setting up automatic minimum payments at the beginning of the month so that you’re forced to budget around your debt payments and you never miss a payment. The last thing that you need is to miss a payment because you were busy at work. That can leave you with a lasting impact from a late fee, hiked interest rate, and a hit to your credit score. In other words, avoid late payments at all costs!

And speaking of interest rates, remember that they’re negotiable (especially if you’ve been a long-time customer with a history of timely payments). Call your credit card company and ask them to lower your rate for at least a 12-month period. The worst they can say is no.

Tackle Education Loans Next

Once you have your credit card debt under control, you should turn your attention towards your education loans. As with your credit cards, you should be paying your monthly minimum payments on time even while paying off your credit card debt. Now that you’ve conquered your credit card debt, you should have some money left in your monthly budget to put towards knocking out your school loans. You can also apply the same high interest or snowball strategy as you used for your credit card payments and keep pluggin along knowing that you are on your way to being debt-free!

More to come on Income-Driven Repayment (IDRs) options and refinancing in a future post. In the meantime, know that generally refinancing loans can be beneficial if you can lower the interest rates of your loans. Loan consolidation, on the other hand, can help with organization, but usually not much else.

Examine Your Car and Home Loans

The last type of loan you may have are secured loans - loans where assets are attached to the loans. The most common example of these are car loans and home loans (or mortgages). Paying these off early can often feel completely liberating and save you a tremendous amount in interest payments, but I often recommend waiting to attack these until you have a fully funded emergency saving account and are maxing out your retirement contributions.

If you’ve accomplished both of those items already, then go for it! My preference has always been to pay off car loans first. There’s nothing better than a car without a car payment and that money that used to wander out your door monthly to pay for your car is now completely freed up to go towards additional mortgage payments. Your mortgage can also be paid off early, though you should check with your mortgage lender to ensure that there are no penalties for early repayment.

Additionally, your home loan may include premiums for Private Mortgage Insurance (PMI). This is essentially insurance you may have been required to hold because your down payment on your home was not sufficient to make your lender feel comfortable that you wouldn’t default on the loan. If you pay your mortgage off quicker, you should be able to put an end to those monthly PMI payments sooner which will free up even more money in your budget. Make sure you keep an eye on the outstanding mortgage value vs. your home’s appraised value. Most mortgage lenders will allow you to drop PMI insurance once you that ratio gets down to 78-80%, but you may need to call them and make them aware that you have gotten to the point where you qualify to be removed from the PMI requirements. Take a look at your mortgage policy for your specific lending requirements.

A Final Note

Give yourself credit for tackling your debt. Remember that this is a long (and completely normal) journey. You are not alone and you CAN do this! Celebrate the small victories and know that even if it’s taking longer than you’d like it to, by facing your debt head on, you are bravely going where others are afraid to go. Hang in there… someday money will be feel freeing instead of just terrifying.


Written By: Lindsay Dell Cook

Lindsay Dell Cook is an accountant, turned writer and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.