Which Debts Should You Tackle First?

Then there's the issue of how to prioritize your bills. Often borrowers are advised to figure out which of their debts have interest that's tax-deductible, and to pay those last. They're told to concentrate on paying off the highest-interest-rate, nondeductible debts they have, while paying the minimum on other debts. Once the high-rate debt is paid off, they're told to apply the same payments to the next-highest-rate debt, in a process known as "snowballing."

In some cases, though, it can make more sense to pay a lower-rate debt first, or even a deductible debt before a nondeductible one.

Ginny owed $30,000 in student loans at 5% interest as well as $35,000 on her home equity line of credit, which hovered around 4%. Her income was too high to deduct her student loan interest, but her credit line payment was a write-off. The conventional wisdom would have her pay the student debt first.