Want a simple way to decide how to prioritize which debt to pay down first?
There are so many options- highest interest first, lowest balance first, highest minimum payment first, and on and on…
And, while those are viable options, there is a great formula you can use that makes it super easy to see which debts are costing you the most.
Ready???
Take the total balance of each debt and divide it by the minimum payment (this is the minimum balance on the statement, not what you actually pay).
So, if you have a credit card with a balance of $10,000 and a minimum payment of $400, you would divide $10,000 by $400 and have a score of 25.
If you have a student loan of $20,000 and a minimum payment of $150, you would divide $20,000 by $150 and have a score of 133.
What do these scores mean?
First, sort your scores from lowest to highest.
The lower the score, the more that debt is really hurting your financial goals.
Anything with a score under 50 is your highest priority.
Scores 51-100 are not that great, but are not doing too much damage.
Scores over 100 tend to be your “good debt”. These tend to be debts that are helping you create financial abundance and tend to be things like mortgages and student loans (before college prices went out of control).
How do your score results compare to your current methodology?
Please note, I cannot take credit for this formula. Unfortunately, I do not know who did so I cannot give full credit to the creator.