Blog Post
Which debt should I pay down first?
So, you've come into a little extra cash. Maybe you got a bonus at work, or your pet walking business got busy over the summer.
So, you came into a little extra cash. Maybe it was a bonus, some side-hustle income, or a lucky month. Now you want to use it to pay down debt.
The question is not just, "Which balance is biggest?" The better question is, "Which debt is costing me the most?"
The Simple Math
To make a quick back-of-the-napkin decision, list each debt and note:
- the balance
- the annual interest rate
- the monthly interest rate
- the rough interest charge for the next month
To estimate the monthly interest charge, multiply the balance by the monthly interest rate.
A Quick Example
- Retail Visa: $3,000 at 23% APR = about $57.60 in monthly interest
- Bank Visa: $13,000 at 19% APR = about $205.40 in monthly interest
- Car loan: $20,000 at 4% APR = about $66.00 in monthly interest
Even though the car loan has the biggest balance, the Bank Visa is draining far more money each month.
The debt with the biggest balance is not always the debt doing the most damage.
What This Method Helps You See
- A lower balance can still be expensive if the rate is high.
- A high rate is not the whole story if the balance is small.
- Monthly interest cost gives you a practical way to compare debts quickly.
One Important Reality Check
Math is not the only thing that matters. Emotions matter too.
If paying off a smaller balance first gives you momentum and relief, that is still a real win. But if you want the most cost-conscious approach, focus on the debt that is charging you the most each month.
If you want more help without doing the math yourself, the original article points readers to a NerdWallet calculator.