Which debt should I pay off first if I have several?
I'm Plasti, a credit card, and I know a thing or two about debt. Most people pay extra toward the wrong debt first; let me show you which one makes sense and why.
PlastiYour debts, your instalments and their dates.
Updated
The biggest debt isn't always the most expensive
When you have several debts and some money left over, the natural move is to pay down the biggest one, because it's the scariest, or the oldest one, because you're tired of it. It makes sense, but it isn't always what saves you the most.
What a debt really costs you isn't its size, it's its interest rate. A small debt with a high rate can cost you more each month, proportionally, than a big one with a low rate.
Look at all your debts together
The first step is to line them up side by side: the credit card, the motorbike loan, the loan from a relative, the purchase in instalments. For each one, write down how much you owe, the monthly payment, the due date and the interest rate. If one doesn't show a clear rate, ask for it: knowing what you're charged comes first.
Seeing them together already brings some calm: you know exactly what you have, what's due first and how much is left on each. Often the feeling of debt weighs more than the debt itself.
Compare their rates
The rate tells you how much each debt charges you for what you owe. You'll find it on your statement, in your contract or in your bank's app. Make sure they're in the same unit: a monthly rate isn't the same as an annual one, so always compare like with like.
If a debt charges no interest, like a loan from a relative, leave it at the end of the line for extra payments, while keeping up with what you agreed.
Pay extra toward the most expensive one first
If you have something extra to pay, put it toward the debt with the highest rate, even if it isn't the biggest. Every extra payment there saves you more interest than the same payment elsewhere. When it's paid off, move that money to the next most expensive one. This is known as the avalanche method. It isn't magic: it's getting rid of expensive interest before the cheap kind.
Before paying extra, ask your bank how the payment is applied: whether it goes to the principal and whether it shortens the term or lowers the instalment. That way you know exactly what your money is achieving.
And keep the others current
Paying extra on the most expensive debt doesn't mean neglecting the others. Keep making every minimum payment on time, because falling behind brings late fees and penalty interest and hurts your credit history. Getting a reminder before each due date takes that worry off your plate.
If at some point you feel you can't keep up with every payment, talk to your bank before you fall behind: there are often options to restructure your payments.
Frequently asked questions
What is the avalanche method for paying off debt?
It means paying the minimum on all your debts and putting every extra bit of money toward the one with the highest interest rate. When that one is paid off, what you were putting into it moves to the next most expensive, and so on. It's the way to pay the least interest overall, even if the first wins take a little longer to show.
Is the snowball or the avalanche method better?
It depends on what works for you. The snowball pays off the smallest debt first, and finishing it quickly is very motivating. The avalanche pays off the most expensive first, and it saves you more interest. If you struggle to keep momentum, the snowball can help; if you want to pay less overall, the avalanche usually wins.
Is it worth making extra payments on a debt?
Generally, yes: whatever you pay above the instalment reduces what you owe and the interest calculated on it. Before you do, check with your bank how the extra payment is applied and whether your loan has special terms. And don't neglect your other payments or leave yourself short for what's coming due.
This is financial education, not advice: Oslo doesn't recommend loans or investments. Decisions about your money are yours.