Debt is a common part of modern financial life. Mortgages, student loans and credit cards all involve borrowing money that will need to be repaid over time.

Debt only becomes problematic when repayment costs grow too large or begin to interfere with other financial goals. Understanding how debt works and how to manage it can help you keep your finances balanced.

Which debts should you tackle first?

When managing debt, it can help to distinguish between priority debts and other types of borrowing.

Because the consequences of falling behind can be significant, financial guidance often suggests addressing these debts first.

Once priority debts are under control, attention often shifts to the cost of borrowing. Debt with interest rates above roughly 8% is often described as high-interest debt, because the cost can grow quickly. For example, paying 10% interest on a loan while earning 3% on savings means the debt is increasing faster than your savings.

For this reason, some financial frameworks suggest prioritising high-interest debt before focusing heavily on investing, although this is not the only possible approach.

After these factors are considered, people sometimes use structured repayment strategies. Two commonly discussed methods are the snowball method and the avalanche method.

Common repayment strategies

Once priority debts are under control, people sometimes use structured approaches to reduce other debts. Two commonly discussed repayment strategies are the snowball method and the avalanche method.

Snowball method

The snowball method focuses on paying off the smallest balances first, regardless of the interest rate. Once the smallest debt is repaid, the payment is redirected toward the next smallest balance. Some people prefer this approach because seeing debts disappear quickly can create motivation.

Avalanche method

The avalanche method prioritises debts with the highest interest rates first. This approach typically reduces the total interest paid over time, making it mathematically more efficient.

Keep in mind that the avalanche method prioritises by interest rate, not by loan size. A higher rate means a balance is growing faster relative to its size, no matter how large or small that balance is.

Behavioural factors in debt decisions

If prioritising high-interest debt is often the most efficient approach, you might wonder why some people choose the snowball method, which focuses instead on the smallest balances first. The reason is that debt repayment is not only a mathematical decision.

Some people may struggle to stick to a repayment plan that feels like they’re making imperceptible dent in a large, overwhelming amount. Behaviour and psychology are important factors in making progress.

In the context of debt repayment, paying off smaller balances first can create visible progress. Each cleared debt can make the remaining task feel more manageable, which may help some people stay motivated and continue reducing their debt.

This is one reason why some people prefer the snowball method, even though it may not always minimise the total interest paid.

Balancing debt repayment with other priorities

Deciding how much money to allocate toward debt repayment depends on your broader financial situation.Some frameworks suggest comparing:

• the interest paid on debt
• the interest earned on savings or investments

If the cost of the debt is significantly higher than potential returns elsewhere, prioritising repayment may make sense. At the same time, it is often important to maintain some financial stability. For example, many people aim to keep a basic financial buffer in place while working on debt repayment. The right balance depends on factors such as income stability, risk tolerance and personal priorities.

Disclaimer: Peaks is an execution only service and does not provide financial advice.