‘Not all debt needs to be paid off as soon as possible,’ says CFP—what to focus on first (2024)

A little over 40% of Americans would consider themselves financially successful if they were able to clear their debt, according to a recent Bankrate survey. But that's often easier said than done.

Overall, Americans are carrying a substantial amount of debt. Household debt rose to $17.69 trillion in the first quarter of 2024, according to the New York Federal Reserve. That number includes mortgage debt, car loans, student loan debt and credit card debt.

If you're juggling multiple types of debt, it's important to remember that all debt isn't created equally, says Avani Ramnani, a certified financial planner and managing director of Francis Financial.

"Not all debt needs to be paid off as soon as possible," she tells CNBC Make It.

Here are three steps to figure out which of your debts you should prioritize paying down first and how to get started tackling it.

Before you begin crafting a strategy to pay off your debt, gain a clear understanding of the different types of debt you owe and the associated interest rates.

One way to do this is by creating a spreadsheet that lists the various credit cards and other outstanding loans you may have, Ramnani says. For each debt, include the name of your lender, your outstanding balance, the minimum payment, any due dates and the interest rate.

"For anyone who's serious about getting ahead financially, I would say take the bull by the horns and get all your debt organized so you know what you're doing," she says.

After you know how much debt you owe, you can decide how to start paying it down. Ramnani recommends prioritizing the balance with the highest interest rate first, since it has the potential to grow the fastest.

For many people, that will likely be a credit card. The average credit card annual percentage rate is around 24.7% as of May 13, according to LendingTree. And for most credit cards, interest accrues daily. If you don't pay it off each month, that accrued interest is added to your overall balance and can cause your credit card debt to quickly balloon.

Not taking care of that costly debt can prevent you from meeting your other financial goals, Matt Schulz, chief credit analyst at LendingTree, tells CNBC Make It.

"If you've had high-interest debt, such as credit card debt, for many years, all the interest you pay on that debt is money that could have gone to an emergency fund or longer-term goals like retirement, college funds or a mortgage down payment," he says.

On the other hand, it's OK to take your time paying down debt with a lower interest rate, such as your mortgage or federal student loans, since it typically accrues at a slower pace, Ramnani says.

The average interest rate for 30-year fixed mortgages is 7.03% as of May 30, according to the Federal Reserve Bank of St. Louis. And the interest rate for federal student loans ranges from 5.5% to 8.05%, per the Department of Education.

If you want to follow Ramnani's advice and focus on your balance with the highest interest rate first, you'll follow what's known as the avalanche method.

After you've made the minimum payments on all of your debts, funnel any extra money toward the one with the costliest APR. Once that's paid off, move on to the one with the second-highest interest rate, and so on.

If you're more motivated by small wins early on, you might want to try the snowball method. To do this, direct any money leftover after making all your minimum payments toward your lowest balance. After that's cleared, put any extra toward your second-lowest balance, working up to the largest one.

And remember, there isn't a one-size-fits-all strategy for paying down debt. What matters is that you simply get started, Schulz says.

"Overall, people shouldn't overthink paying down debt," he says. "If you begin with one method and you don't feel comfortable with it, don't be afraid to change your plans. Better to tweak and course-correct than to just get frustrated and give up."

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