Bills arrive in your mailbox every month, all demanding payment. Each one is important, and you know creditors will call if you don't pay them on time. High-priority debts should always be paid before everything else. After that, you must tackle all your other debts. How you choose to do this depends on whether you prefer to pay less interest over time, or to have more consistent rewards over the course of repayment.
High-priority Debts
Most people have certain crucial debts that must be paid prior to other debts. Crucial debts include anything that is an absolute necessity, such as food, shelter and transportation to and from your job. If you don't pay your mortgage or rent on time, you will soon end up on the street, so this is a crucial debt. If your car is your only means of getting to work, that's a crucial debt as well. Pay these types of debts before tackling any others you might owe.
Other Debts
Every creditor wants you to consider its debts as a high priority. However, anything that isn't a crucial debt that is essential to your ability to live your life is lower priority. These types of debts include credit card debt, student loans and medical bills. You still need to make at least minimum payments on them, but they are not typically as important as your crucial debts. For one thing, these debts are typically unsecured. Creditors can send stern notices and turn your accounts over to collections departments if you have delinquencies, but they cannot usually take drastic measures, such as repossessing property or foreclosing on your house.
Snowballing
For less crucial debts, try the snowball method of payment. Make a spreadsheet that shows each current debt, the total amount owed, your current interest rate and the minimum payment amount for each account. Budget your money so that you pay at least the minimum payment on each one. Use any extra money you have to pay down the debt with the highest interest rate. Every extra dollar you put toward paying off that debt means you pay less interest on it, because you pay it down more quickly. Once you pay off your highest-interest balance, take the amount you were paying toward that debt and put it toward your next highest balance. Continue until all debts are paid in full.
Lowest Balance First
Snowballing saves money, but can sometimes feel like it's taking a long time to see results. Even though you know you're helping yourself save money, it's nice to receive positive affirmation that you're on the right track. If you feel that you're more likely to maintain your motivation to pay off your debts by getting small rewards along the way, change the way you order your debts. Pay off your debts in order of the amounts of your balances, starting with the lowest one first. Use the same principle as with snowballing, and make at least minimum payments on all your debts. Then use whatever extra money you have to pay off the lowest balance as soon as possible. Work your way through the rest of your debts, moving on to the next lowest balance after the first is completely paid off. This system provides you with a more consistent sense of reward, although you will end up paying more interest.
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