You are sitting there at your desk after the new year and wondering what in the world to do with all the bills.  So what do you do?  Where do you even start?  First of all, you need a spending plan.  Then you need to tackle the debt one step at a time.  But which debt do you pay first?

The best way to reduce your debt is to pay off the smallest debt with the highest interest rate.  So if I had three credit cards with the following situations:

1. $500 balance at 18% interest
2. $1,000 balance at 12% interest
3. $2,000 balance at 8% interest

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You can quickly see that there is no question, I would pay off the $500 bill first.  Once I finished paying it off, I would then take what I had been paying on that bill and add it to the amount I had been paying on the $1,000 bill to help pay it off faster.  Then repeat it with the last bill.  But what if the interest rates were reversed and the situation looked like this?

1. $500 balance at 7% interest
2. $1,000 balance at 14% interest
3. $2,000 balance at 20% interest

How would you handle it?  From a purely financial situation, you would pay off the $2,000 balance first; however, that is going to take you four times the amount of time to pay off as it would take you to pay off the $500 balance.  So the question is do you have the determination to hold on until you have paid off the biggest bill?

Most of us prefer to see the progress made and to receive less bills in the mail.  So the real root question is “which way will enable you to keep eliminating debt effectively and keep you continuing on the path with determination?”  And while paying off the $2,000 is the best financial answer, paying off the $500 balance may be the best practical answer.  Each family needs to determine that answer based on you personally.

You can also look at transferring the balance on the higher one to reduce the interest while you pay off the smaller balance.  Just be sure to read all the fine print such as transfer fees, penalties for late payments, and if you take an introductory offer, what happens if it is not paid off before the time of that offer is up.  And remember the real key is pay the debt off and stay out of debt!