Debt
Debt is arithmetic with a deadline. These guides show the order to clear it in — which is rarely the order that feels best.
Debt is arithmetic with a deadline, and most of the difficulty people have with it is not mathematical. The order in which you clear multiple debts has a mathematically correct answer, and the mathematically correct answer is not always the one you should follow — which is an unusual thing to be true in finance and worth being explicit about.
The one case where there is no trade-off is a revolving credit card balance. At the rates commonly charged in India, annualised well above forty per cent, it outranks every other debt and every investment decision you could make with the same rupee. No portfolio reliably returns what a card charges, so clearing the balance is the highest guaranteed return available to most households.
These guides show the arithmetic in full rather than asserting conclusions, because the conclusions depend on your own rates. Take the numbers from your own statements — a card's monthly rate, a loan's annual one — and redo the calculations on them.
Key terms
- Avalanche method
- Paying minimums on every debt and directing all spare money at the highest interest rate first. Mathematically optimal — it always minimises total interest — and correct wherever the rate gap between your debts is wide.
- Snowball method
- Paying minimums on every debt and directing all spare money at the smallest balance first. Costs more in interest and clears individual debts sooner, which raises completion rates. A reasonable choice where the rates are close, and an expensive one where they are not.
- Revolving
- Carrying a credit card balance past the statement due date. It triggers interest at the card's full rate and typically removes the interest-free period from new purchases until the balance is cleared in full.
- Minimum payment
- The smallest amount that keeps a card account current, usually a small percentage of the balance. On a typical balance most of it is absorbed by that month's interest, which is why paying it reduces the principal only marginally.
Frequently asked questions
Which debt should I pay off first?
The highest interest rate, unless every rate you hold is within a few percentage points of the others — in which case pay the smallest balance first, because the interest difference is small and finishing something visible raises the chance you complete the plan. A revolving card balance is the highest rate in almost every household and comes first under either method.
Is all debt bad?
No, and the useful distinction is rate and purpose rather than morality. A home loan at single-digit rates against an appreciating asset is a different instrument from a card revolving above forty per cent. The test is whether the rate is below what the money could reasonably earn elsewhere, and whether the repayment fits in a month you can survive.
Should I clear debt before building an emergency fund?
Build a small buffer first — around one month of essential expenses — then attack the debt hard, then complete the fund. Without any buffer, the first unexpected expense goes straight back onto a card and the payoff restarts, which is more expensive than the interest the buffer costs you.
Does paying off debt help my credit score?
Reducing card utilisation usually helps and can act relatively quickly. Closing an old account can hurt, because it shortens your credit history and removes available limit. The mechanics are not intuitive, which is why [what moves a credit score](/learn/credit-scores/what-moves-a-score) is worth reading before closing anything.