Two ways to pay down debt, highest rate first or smallest first

Paying down debt starts with knowing what you owe and when each payment is due. There are two basic ways to do it: the highest interest rate method and the snowball method. Both keep the minimum payment going on every debt and put any extra money toward one of them. They differ in which debt gets the extra money.

The highest interest rate method

This method aims at the debt with the highest interest rate. After the minimum payments, any extra money goes to that debt, and once it's paid off, the extra goes to the next highest rate. It may not feel like progress at first, especially if the first debt is large.

The snowball method

This method aims at the smallest debt. You make the minimum payment on every debt and put any extra money toward the smallest one. Once it's paid off, the money that went to it goes to the next smallest, and the payments grow like a snowball.

You see progress quickly with this method, as the smaller debts disappear.

How they compare

Neither method is better than the other. Each has pluses and minuses, and paying only the minimum balance makes it hard to make a dent in a debt.

Knowing what you owe

Either method starts from a list of your debts, sorted by size or by interest rate.

An annotated example

What to do next

List each debt with its balance, its interest rate and its minimum payment, using copies of the bills, and put each due date on one calendar. Either way, every debt keeps getting its minimum payment, so none falls behind. The list is what either method starts from.