If you have several debts, you have to choose which one to pay off first. By the numbers, the answer is simple: the one with the highest interest rate, because it costs you the most each month. But research shows that most people do the opposite and pay off the smallest debt first.
That isn't just a mistake. In experiments, participants paid off small debts first even when the larger ones had higher interest rates, and so they paid more in total. At the same time, data from a debt settlement company showed that people who closed individual debts were more likely to become completely debt-free, no matter how large those debts were. Small wins keep people going.
Choose an approach that fits you:
- Most expensive first if you want to pay the least interest.
- Smallest first if you need to see progress to keep going.
- One quick win, then most expensive if you want both.
- Consolidate and negotiate if your debts don't add up.
A first step today: write a list of all your debts with the balance and interest rate, and circle the most expensive and the smallest.
If your debts feel unmanageable, look for free debt advice. It's available in many countries.
Paying off debt starts with a choice: which debt should go first? Going by interest, the answer is the most expensive one, because it costs you the most each month. But most people pay off the smallest one first, and research shows that this both costs money and can help you stick with it. This article walks through what the studies show, four ways to pay off debt and what to do if the numbers don't add up. Why debt comes before saving is covered in personal finance in the right order.
Why debt grows even though you're paying
If you pay only the minimum on a credit card each month, most of your payment often goes to interest and little to the debt itself. The balance shrinks slowly, sometimes not at all, and after a year it feels like nothing has happened. That's where many people give up.
Debt also feels heavy for another reason: there's a lot of it. A car loan, a credit card, an installment plan for a phone, a loan from a friend. Each debt is its own bill, its own due date and its own worry. That's why the order you choose matters, not just for the money but for how long you can keep going.
By the numbers: most expensive first
In 2011, Amar, Ariely, Ayal, Cryder and Rick had participants play a game in which they held several debts with different interest rates and had to pay them off over time, with real money as the reward. The winning strategy was to pay off the debt with the highest interest rate first. Yet across four experiments, participants repeatedly paid off the small debts first, even when the larger ones had higher interest rates, and so they paid more in total.
The researchers call this debt account aversion: having three debts feels better than having four, even if it ends up costing more. When participants couldn't pay off the small debts completely, and when their attention was drawn to how much interest each debt had accrued, they reduced their total debt faster.
But small wins keep you going
In 2012, Gal and McShane analyzed data from a company that helped people negotiate their way out of debt. People who closed individual debts were more likely to become completely debt-free, and that held true regardless of how large the closed debts were. How much money had been paid off did not predict becoming debt-free once the share of debts that had been closed was taken into account.
This is a correlation in records data, not a randomized trial. But it points to something many people recognize: seeing one debt disappear completely gives you the energy to keep going. So the studies pull in different directions, and that's why there's no single right answer for everyone.
Four ways to pay off debt
Always pay the minimum on every debt. Then put whatever extra you can toward one debt at a time, using one of the approaches below.
- Most expensive first The avalanche method. The highest interest rate goes first, and you pay the least interest overall.
- Smallest first The snowball method. Every debt you close gives you the energy to keep going.
The studies pull in different directions. The best order is the one you stick with.
Most expensive first. For you if you want to pay as little interest as possible and can wait for your first win. This is often called the avalanche method. First step: sort your list by interest rate and put everything extra toward the one at the top.
Smallest first. For you if you need to see progress to keep going. The smallest debt goes first, then the next smallest. This is often called the snowball method: once a debt is gone, the amount you were paying on it goes to the next one. It costs more in interest, but if you stick with it, it's worth more than a plan you abandon. First step: sort your list by balance and put everything extra toward the smallest.
One quick win, then most expensive. For you if you want both. Pay off a small debt that you can close within a month or two, then switch to the most expensive one. You get the feeling that it's working without paying interest on the most expensive debt longer than necessary. First step: pick the debt you can close the fastest.
Consolidate and negotiate. For you if your debts don't add up against your income, and it's the most demanding approach because it requires conversations. Contact your lenders before you miss a payment, not after. Many can set up a payment plan. A consolidation loan can lower your interest rate but often stretches out the repayment period, so read the terms carefully. First step: call the lender you're most worried about this week.
When it doesn't add up
If your income doesn't cover the minimum payments on all your debts, it's not a question of method. You need help. Free debt advice is available in many countries, often through local authorities or nonprofit organizations, and it can help you negotiate with your lenders. Be careful with companies that charge to solve your debts for you.
If worry about debt is affecting your sleep or your daily life, talk to someone you trust, or to a doctor or health professional.
This article doesn't replace advice about your specific situation.
A first step today: write a list of all your debts with the balance and interest rate, and circle the most expensive and the smallest.
If it's the worry more than the debt that's taking over, the next part of the series is about stress about money.
This is the understanding and a first step. Atlas is where it becomes a habit. If you add Money as its own area, you'll find Weekly review and Buffer check there as suggestions to make your own, so you can see week by week that you're making progress. Try Atlas free for 7 days, and cancel whenever you want.