According to the National Consumer Law Center’s (NCLC) online resource, Surviving Debt, determining what debt to pay off first starts with one rule: “Prioritize debts whose non-payment immediately harms your family.”
How to Prioritize Debt in 3 Steps
Here are the 3 steps the NCLC recommends for how to prioritize debt.
1. High-Priority Debt
Step one of determining what debt to pay off first is to figure out your high-priority debt. Not sure how to do that? Ask yourself – what payments could harm you most if you skipped a payment? Hint: your answer cannot be, all of them. While it can feel that way, it’s important to really think about what can harm you and your family. For example, not paying a criminal justice debt you owe could land you in jail. That is high-priority.
What other debt examples fall under this category? Here are a few outlined by the NCLC:
- Auto loans: If you don’t pay this, you can lose your car which limits travel and can potentially cost you a job.
- Child support payments: This is a legal obligation that can lead to prison if payment is avoided.
- Rent: If you don’t pay rent, you could get evicted.
- Utility bills: You want to keep the water running and the lights on as this is an essential for your family’s wellness. So utility bills can’t be put off.
2. Medium-Priority Debt
Next step in how to prioritize debt is to determine which payments you should consider medium priorities. Medium-priority debt includes monthly payments that are important BUT you’re able to delay them without serious penalties. Why are they considered medium priority? Because these bills could end up being high-priority debt down the road, but the severe impact is not immediate. This would include debt like:
- Your mortgage
- Property taxes
- Federal student loans
- Federal tax payment
If you’re struggling financially during the pandemic, there are federal programs and other relief options that may help you defer these payments until you’re in a better place.
3. Low-Priority Debt
Now that you know what debt to pay off first and second, the third, and final category is low priority debt. Again, low-priority debt is important to pay off, but the penalties you face are far less than high or medium-priority debt. So what kind of debt does low-priority include? According the NCLC, the following bills are considered low-priority debt:
- Medical debt
- Credit card debt
- Private student loans
- Personal debt owed to friends and family
- Debts owed with a co-signer
Like any debt, if put off long enough, low-priority debt can climb the ranks to become high priority, so you don’t want to avoid paying these bills for too long.
What Debt to Pay Off First: The Bottom Line
While there are ways to prioritize your debt, it’s important to note that no matter the level — low, medium or high — there are consequences to skipping monthly payments. If you have the finances to cover your monthly bills, do it.
If you’re struggling to make ends meet, in addition to prioritizing what debt to pay first, there are relief options available for certain loans and bills. Also, it never hurts to call your service provider or lender and see if there’s a special payment plan or short-term arrangement that can be made to accommodate your limited budget.