Should You Prioritize Paying Down Debt By Balance Or Interest Rate?

Should You Prioritize Paying Down Debt By Balance Or Interest Rate?

| November 04, 2020
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If you currently are carrying a lot of debt, it can be hard to know where to start paying it off. Your mortgage debt, car loans, student loans, and credit card balances all likely carry different interest rates, are due at different times and have different loan balances. The most important step to take may be creating a paydown plan that works for you. Below are some common approaches and pros and cons of various paydown plans. 

Paying Off High-Interest Rate Debt First

One approach calls for you to pay off your debt that carries the highest interest rate first. That’s usually credit cards, which can carry interest rates of 15% and above. By tackling your credit card debt first, you can greatly reduce the amount of money you’re paying in interest on top of repaying the money you borrowed to buy goods and services. If you owe money on several credit cards, sit down with your statements to see which one is currently charging the highest interest, and work toward paying that debt down first if possible.  

Generally, carrying large credit card balances month after month will be a drag against reaching other financial goals, like saving for a house or retirement. After you pay down your credit cards, reexamine your spending to make sure you don’t simply run your balances back up again. Also, consider building an emergency fund that you tap into for car repairs, medical bills, and other unexpected expenses so they don’t all end up on your credit card. 

Student loan debt often carries higher rates than car loans or mortgages. For that reason, you may want to prioritize paying down this debt first, especially since once the loan is paid off in full, you likely won’t replace it with another debt, unlike a mortgage or car loan. 

Paying Down Debt By Balance

There’s also the argument for paying down your debt based on its balance. Paying off small debts creates a positive psychological boost that will give you the momentum to tackle larger debts. This approach can make sense, especially if your smaller debt is from a credit card or store charge card, both of which carry higher rates. 

You might choose to go in the other direction and tackle your debt with the largest balance. Doing this can improve your credit score, as your credit rating is often based on the amount you have borrowed against credit lines such as a credit card. You can also “pay it forward” with your personal finances by paying your mortgage off entirely and driving a car that you own outright. If you follow this approach, just be sure you’re not negating any positive effect by carrying high-interest debt on other loans. 

Debt And Your Financial Plan 

Getting your debt situation under control is a crucial step in financial health. Do you need help in exploring your repayment options, or determining whether taking on a mortgage or student loan fits into your overall financial plan? We can help you make smart borrowing decisions and tame the debt monster. Contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

About Haydel, Biel & Associates

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by  Haydel Biel & Associates or performance returns of any  Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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