There’s some debate among financial planners as to the best way to pay down debt. Some say paying the highest interest rate debt first is the best way; others say paying the smallest balance first is the best way.
Both methods have advantages and disadvantages, so we’ll take a look at both, and help you decide which method is best for you.
Method #1 – Highest Interest Rate
In this method, you focus on paying off your highest interest rate debts first. The basic steps in this method include:
1. List all debts in order from the highest interest rate to the lowest interest rate.
2. Commit to paying the minimum payment on every debt.
3. Determine how much extra can be applied to the highest interest rate debt.
4. Pay the minimum amount plus the extra amount towards the debt with the highest interest rate until it is paid off.
5. When that debt is paid off, apply the amount you were paying to the debt that is paid off to the next highest interest rate debt until paid off.
6. Repeat until all debts are paid in full.
This method is the best method mathematically, as you will pay less interest in the...
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