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Financial Dilemma: Which Debt Should You Pay Off First?

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If you want to learn how to pay your debts easily, we will tell you that there is no easy way around it. No matter what you do, you eventually have to pay the money. However, there are still ways for you to make the process less stressful – and that is by figuring out a payment priority.

Discovering the Order

So how to pay your debts in an appropriate order so that you can save money? There are many theories. One option is for you to pay the debts with the highest interest rates first, and then pay the minimum for the ones with lower interest rates. This way, you will manage to save money in interest over time, and you’ll be able to pay off the debt much faster.

On the other hand, there are those who claim that paying off the smaller debts is the more convenient option – since it will allow you to build momentum. Since you will have a solid plan, you will be able to focus that extra money into other debts, thus allowing you to get out of the vicious cycle much faster.

Which Ones to Pay

If you are still confused about how to pay your debts efficiently, here are a few reasons why you should opt for either option:

  • Paying Off High-Interest Debts

In a way, it makes sense for you to pay the debts that have the highest interest rate since this debt will cost you a lot of money every month – especially if left unattended. On the other hand, if this debt is the largest, then you may find yourself paying on it for more than a year. This, in return, will make you feel like you aren’t progressing at all – therefore, making you lose sight of the big game.


  • Paying Off Small Debts

A lot of people gain a lot of satisfaction by paying the smaller debts first. The reason is that once you are done with the smaller debts, you can focus your attention on the bigger ones. Also, the feeling of actually getting something done is much stronger, and this might give you an extra boost to keep up with the good work. Keep in mind that by paying off the smaller debts first, you may end up putting the high-interest ones last – which may cost you money in the long run.

Balancing Your Approach

If you want to learn how to pay your debts smartly, you should understand that nothing is simply black and white. Some people might find the high-interest payments a priority, while others will lean towards paying the smaller ones.

Truthfully, it all depends on the length of the loan. If you have a bigger loan with high interest, then it makes sense that you pay that one first, to avoid the charges in interest. On the other hand, if the interest rates aren’t high and you have a few loans that you can knock off in a few months, then go for the smaller ones. You’ll have fewer problems to deal with.

Smallest Balance First

Another method that gathered quite some fans consists of paying the lowest balance debts first. This way, you get rid of a debt pretty quickly and get lots of satisfaction from it. You can use this as motivation to continue paying for the next debt in line and sooner than you think, you will live a debt-free life. Making sacrifices and living on a budget is not easy, as we all know, so these moments of success can give you that extra energy you need.


Credit Limit

If you plan on getting a mortgage, for example, then you need to take care of your credit score. This will improve the chances of getting a better loan. Why? Because credit utilisation (the percentage of your available credit limit) has a great contribution to your credit score.

For example, if you have a credit card with a $20,000 limit and have a $18,000 balance on it, your credit utilization is 80%. To improve your credit score, you need to have a lower percentage, preferably under 30%.

What you will have to do is put the debt with the closest credit limit first on your list and start paying it off before the other debts.

Final Thoughts

Sometimes, you might not be able to figure out by yourself a certain plan on how to manage your debts. But do not be discouraged, since there are plenty of solutions out there.

For further help, you can call us on 1300 123 328 to find out how we can help you manage your debts. You’ll learn how to pay your debts efficiently by using the services we provide. Do not hesitate to ask us any questions you have. Enquire now and you might discover that the solutions we are offering are exactly what you need to get rid of your debts.