Many people have some debt at some point. That is normal. What matters is knowing what each debt costs you, because two debts of the same size can be very different in price.
What is debt?
Debt is money you borrowed and have to pay back, usually with extra on top. That extra is called interest. It is the price of using someone else’s money for a while.
Not all debt costs the same
The price of a debt is mostly its interest rate, plus any fees. A higher rate means more extra to pay.
A simplified example with made-up numbers. Say you owe 1,000:
- At 5% a year, about 50 of interest is added over the first year.
- At 20% a year, about 200 is added over the first year.
Same debt, four times the cost. And the cost keeps growing if the debt stays unpaid, the same way compound interest grows savings, only here it works against you.
People often call a debt expensive when the rate is high, and cheap when the rate is low. As a general pattern, short-term borrowing that you can keep renewing, such as credit cards or overdrafts, tends to carry higher rates than longer loans for a specific purpose. But this varies from lender to lender and from country to country, so the only way to know is to check the actual rate on each of your debts.
Step 1: Look at what you owe
If you did the steps in Before you invest: where do you stand today?, you already have a list. For each debt, write down three things:
- How much is left to pay.
- The yearly interest rate.
- The minimum monthly payment.
Seeing it on one page is often the hardest part, and the most useful one.
Step 2: Always cover the minimums
Whatever else you decide, paying at least the minimum on every debt is the foundation. Missing payments can add fees and can make borrowing harder and more expensive later. The ideas below are about where to put the extra money, after the minimums are covered.
Two well-known ways to pay down debt
When there are several debts and some money left over, people usually choose one of two methods.
The avalanche. Put the extra money on the debt with the highest interest rate first. When it is gone, move to the next highest. This usually costs the least interest overall, because you remove the most expensive debt first.
The snowball. Put the extra money on the smallest debt first, whatever its rate. When it is gone, move to the next smallest. It may cost a little more interest, but clearing a debt quickly gives a feeling of progress, and some people find that this keeps them going.
Neither one is “the right one”. The one you can keep doing is often better than the one that looks best on paper. The Debt payoff calculator lets you enter your own debts and compare both plans, together with just paying the minimums.
What about investing instead?
A common question is whether to pay down a debt or invest the money instead. A useful way to think about it: paying off a debt saves you its interest rate for certain. Money put into investments might grow more, but it might also grow less, or fall. Many people find that a high-rate debt is hard to beat for this reason. With a very low rate, the picture is less clear, and people reasonably choose differently. This guide cannot decide that for you.
Debt and your safety cushion
If every spare coin goes to a debt and a surprise bill arrives, there may be nothing to pay it with, and a new debt can follow. That is why many people keep a small cushion alongside their debt payments. The guide A small safety cushion looks at both views, cushion first or debt first.
If a debt feels too heavy
If you are struggling to keep up, it usually helps to talk to the lender early, before payments are missed. Many countries also have free, independent services that help people with debt. It is worth looking for one where you live. Asking for help is a sensible step, not a failure.
What to take from this
- Debts differ in price. The interest rate is the main thing to look at.
- Write down for each debt: how much is left, the rate, and the minimum payment.
- Always pay at least the minimum on every debt.
- The avalanche (highest rate first) usually costs less interest. The snowball (smallest debt first) can be easier to stick with. Choose what you can keep doing.
- A high-rate debt has a certain cost; investment returns are never certain.
- If it feels too heavy, talk to the lender early and look for free independent help where you live.
This guide is general education, not advice for your situation. Rates, rules and protections differ between countries, so check how they work where you live.