How to Prioritize Your Debts When Money is Tight

The following is presented for informational purposes only.

Consumer debt in the U.S. keeps rising. According to the Federal Reserve, consumer debt topped $17.5 trillion in the fourth quarter of 2023. It’s due in large part to rising student loan balances, credit card debt, car loans, and mortgages.

If you have multiple debts - as most consumers do - you may be feeling an added anxiety as you try to determine where to focus. Here are some pointers on how to rank your debts in order of importance:

Take stock of all of your debts

Before you figure out which debt to focus paying off first, gather as much information as you can about each of your debts, including:

• Where the debt is (i.e., with the company, or has it gone to collections?)
• Your balance (how much you owe)
• The interest rate
• The payment due date
• If it’s installment credit (i.e., car loan, personal loan, student debt), how many payments are left?
• What’s the minimum payment? 

Debt and personal finance can create some serious emotions, and those emotions can make decision-making harder and more complicated than it needs to be. By laying out the numbers, you can remove some of the emotions and let the facts point you in the right direction.

Consider which debts are costing you the most

If you’re working on prioritizing debt repayment, you’re likely in one of two buckets: you’re either working from a surplus and trying to determine where the extra payments should go, or you’re working with a deficit and trying to figure out which bill doesn’t get paid this month.

If you’re in the fortunate position to be working with a surplus and trying to determine where to make increased debt payments, the simplest solution is to target the debts that are costing you the most. If you have any debts with abnormally high interest rates or costly fees, these are likely the best ones to focus on if you have extra cash available.

Understand the consequences of late payments

If you're in the position of having to consider which payments to skip this month, think of what the repercussions would be if you were late on paying each of your debts, advises Gerri Detweiler, co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights. What is it going to cost you to miss a particular payment?

Detweiler suggests asking yourself the following questions:

• Will there be a penalty fee?
• Will it be reported to your credit report?
• If you fall behind on payments, is there collateral you can lose if you fall behind, such as a car or home?
• If you fall behind on payments, would you experience a significant lifestyle adjustment? For instance, could you continue using your home and car, or would you need to make drastic changes to your living expenses to pay off your debt?

Figuring out which of your debts have the greatest impact on your finances and lifestyle could help you determine which to tackle first. For example, having your credit score dinged for a missed credit card payment isn’t pleasant, but it’s infinitely preferable to having your car repossessed.

Check if providers are flexible

Before making the decision to not pay a creditor or service provider, reach out to see if they can help you. If you ask for what’s called the hardship department, and explain your situation, they might be willing to lower your payments, or temporarily pause your required payments.

If changing the due date on your bills could help you make on-time payments, it certainly couldn’t hurt to give the company a call to see what’s possible.

If you’re currently are in good standing and have been diligent about your payments, you stand a greater chance for the company to listen to your situation, and offer you some options that could help.

What’s more, some providers might be flexible and are willing to set up a payment plan, says Detweiler. For example, if you’re thinking of skipping your credit card payment for a couple months because you just received a sizable hospital bill, contact the hospital first - they may be able to set you up on a monthly payment plan that allows you to stay current with your other financial obligations. It never hurts to ask.

Consider the cause of your issues with debt

If you find yourself trying to determine what bills to skip and which to pay, it’s vitally important that you be honest with yourself about whether it's a short-term problem or a long-term problem, points out Detweiler. If it's a short-term cash issue, work on resolving the issue. For instance, maybe you had a lean month or two, or had your hours scaled back at work and are on the hunt for some side hustles or another part-time job.

“However, if it’s truly not a short-term cash crunch, then reach out for help as soon as possible from a reputable credit counseling agency,” says Detweiler. By connecting with an objective professional, you have a better chance of understanding the root causes of your financial troubles. Best of all, nonprofit financial counseling is available for free.

Or perhaps you’re in a place where your in good shape financially, but you simply have too much debt to juggle every month. In a situation like this you should examine your repayment methods and consider if an option like a consolidated debt management plan might be what you need.

With a debt management plan, you would make a single payment, which would then make payments to the creditors on your behalf. The benefits include no more calls from debt collectors, waived fees, and potentially lower monthly payments and reduced interest rates.

No matter what the circumstances, sitting down and having a good, hard look at debt situation can help you come up with a game plan to pay them off.