I sort debt into three groups: bad debt, better debt, and good debt. Most households can take the middle step this month, which is why I made a one-minute short on moving bad debt to better debt.
Bad debt charges a high interest rate for something that's already gone or losing value. Credit card balances are the usual example, along with store cards and payday loans. Say you carry $8,000 on a card at 24%. About $160 of interest gets added every month, so a $250 payment only knocks about $90 off what you owe.
Better debt is the same balance at a lower rate. You don't owe any less on the day you move it, but more of every payment goes to principal, which means the money you actually borrowed. The tools for this are a 0% balance transfer card, a low-rate consolidation loan, a personal line of credit, a home equity line of credit (HELOC), or a lower-rate auto loan. Move that same $8,000 to a personal line of credit at 9%, and the interest drops to about $60 a month. The same $250 payment now takes about $190 off the balance instead of $90.
The move only works if the old balance stays gone. Pay off a card with a line of credit, run the card back up, and you've doubled the debt instead of fixing it. A balance transfer card usually charges a fee of 3% to 5% up front, and the 0% rate ends on a set date, so divide the balance by the months of the promotion before you move anything. A HELOC also puts your house behind the debt. I'm comfortable with that for a balance I can clear in a year or two. I wouldn't do it for spending habits that haven't changed.
Good debt buys something that pays you. A mortgage on a rental that brings in more rent than the payment costs is the classic example, and so is a loan that starts or grows a business with real customers. Borrowing to buy something that produces cash flow can build wealth faster than savings alone. But good debt turns bad the moment the rental or the business stops paying. A rental with a long vacancy, or a business that loses its biggest client, still has a payment due on the first of the month.
Your home mortgage usually sits in the better group. The rate is low, and the loan is secured by something that tends to hold its value. It doesn't pay you anything, though, which is why paying it down still makes sense once the expensive balances are gone.
So move bad debt to better debt first, because that cuts what you're paying today. Then pay the better debt down as fast as your cash flow allows. Whether you start with the smallest balance or the highest rate is its own choice, and picking a payoff order you'll finish walks through both. Save good debt for when there's a real asset on the other side of it and enough cash flow to carry the payment through a bad month.
Write down every balance you owe, its rate, and what it bought. Circle the highest rate attached to something you no longer have, and move that balance to a lower rate first.