Which Debt Should You Pay Off First?

Hello and welcome to Money Talks. My name is Daniel Ladzinski from Summit Financial Consulting. If you'd like more information about what you hear during our show today, give us a call at 586-226-2100 or visit us online at summitfc.net. And while at my website, click on the radio page to check out past shows and to subscribe to our program on Apple Podcasts, Spotify, or Amazon Music. Today, we're tackling a question that might sound simple, but can actually get pretty complicated. If you ever have extra money, what debt should you pay off first? Medical bills, your mortgage, credit card debt, a car loan? There are pluses and minuses to paying off each of these. We'll talk through it all today. Before we jump in, let me introduce to you my co-host, Tony Shore. Tony, isn't it great when you pay something off? No more monthly payment. Gives me happy vibes, right?

Yeah. Well, it sure does, Daniel. I always feel good when I get that paid off. When my wife and I get a vehicle paid off, we're like, yes. And then we're like, okay, where do we allocate the money that was going to that payment now? And I'm sure that's one thing you're going to talk about with us today, Daniel. But first, the big news here is you, Daniel. You're the big part of the show today because our listeners and viewers, you're new to the show. You're hosting today for Ken. Ken is out. uh, a bit this week, so you decided to jump in, help him out and host the show. You're our show host. Uh, how does that, how does that feel? When did you find out you were hosting the show today? Yeah, feels great. I found, uh, last night actually, so a little bit of an impromptu situation, but I love it. All right. Well, you're doing great. And this is going to be a good one. Obviously, we all get our, you know, I think it's human nature. We all have debts, whether it's a car loan, our mortgage. Unfortunately, sometimes we get caught up in credit card debt or people out there might have debt. some other bigger debts, student loans. So knowing how to pay off debt and which to pay off first, this is going to be a great topic. I know you've been busy, so we'll jump right into it. Where do you want to start? Where do we begin with this?

Yeah. First things first, all debt is not equal. When people hear the word debt, they sometimes put everything into the same category. But owing $10,000 on a credit card at 25% interest is very different from owing $10,000 on a mortgage at 3.5%. Yeah. The balance is exactly the same, right? But the cost of carrying that balance is not. Here's a simple way to think about it. Imagine you owe 10,000 on a credit card at 24%, 10,000 on a car loan at 7%, 10,000 on a mortgage at 4%. Ignoring compounding and some of the finer details, that credit card balance could roughly cost you 2,400 in interest over a year if the balance stayed around $10,000. the car loan would be roughly 700, the mortgage 400. So if I had an extra $10,000 available, paying off the 24% debt gives me a much bigger financial benefit than paying an extra 10,000 towards a 4% mortgage.

Yeah. That's a basic idea. Yeah. So basically what you're saying, Daniel, is it's all about the math, right? 100%. You've got to look at it. And boy, credit cards, I've seen some as high as 30% right now. It is insane. And that is just crippling debt. When you get into credit card debt, it spirals. It's hard to get it paid off. So I see the wisdom there. If you have a windfall or a bonus or a way to pay that off, get that paid off first. So doing that, paying off the highest interest debt first, is there a name for that?

Yeah, that actually basic idea is called the debt avalanche method. You basically make the required payments on everything, but you direct your extra money towards a debt with the highest interest rate.

Okay. And once that's gone, then you move on to the next highest rate and so on. Exactly. All right. So what's another way that we can look at paying off debt? I've heard there's another school of thought out there, right?

Exactly. A second option is called a debt snowball. This is where you pay off the smallest balance first so you have extra monthly money and get that smile because you actually accomplished a payoff, right? Mathematically, the avalanche is not the most efficient way to get rid of debt most of the time.

I think you meant the debt snowball is not the most efficient, but the avalanche is, right? Exactly. Sorry. Yes. Yep. So there's different types of debt out there, though. Tell us about that.

Yeah, there's actually three types of debt that people frequently ask about. Credit card debt is normally number one. Interest rates. Credit cards can have extraordinarily high interest rates compared with most other forms of consumer debt. And high interest debt can compound against you very quickly. Suppose someone has a $10,000 credit card balance at 25%. That's not just a $10,000 problem. It's a $10,000 problem with a very expensive meter running in the background. And this is one reason I generally would not recommend paying extra on a low mortgage while carrying a large balance on a high interest credit card.

So, okay. So, yeah, if you, yeah, paying extra on a low rate mortgage, if you've got high balances or larger balances or higher interest elsewhere, that makes sense, I guess. You know, people talk about good debt and bad debt. My wife and I, our mortgage is only 2.9%. Um, so at that point we're like, why not use the bank's money? Uh, because we could leave our money in investments or use it to pay off higher interest debt. And that's basically what you're saying, right?

That's the right idea. Yeah. I mean, let's say you have a mortgage at 4%, but your credit card's at 24%. If you had an extra thousand dollars and sent to the mortgage, you're effectively avoiding future interest at around 4%. Send that same thousand dollars towards your credit card and you're avoiding interest at a much higher rate. So then that's a pretty easy choice mathematically, right? Definitely. Yeah. Credit cards can also hurt your cashflow though. There's another advantage to eliminating credit card debt. You get rid of the monthly payment. Let's say you're paying 500 or 700 a month towards credit cards. Once they're paid off, that money becomes available for someone else.

Yeah. Well, that's huge. What are some of the things you'd recommend people use that for?

Yeah. Number one is really just, if you don't have one already, going toward building your emergency fund. Also, increasing retirement contributions is a great idea as well. Hanging off the next debt, saving for college, eventually accelerating the mortgage. Credit card debt is the number one target, but there's a lot of other things you can target afterwards.

Yeah, yeah. And what's another reason?

Yeah, revolving credit balance can affect your credit utilization, which is one factor used in credit scoring. Reducing large credit card balances may therefore help your overall credit profile in addition to saving interest.

Yeah. Yeah. Your credit score. That's true. And you need to take a look at that. I know Ken's mentioned that before on past shows that that's important to take into consideration and manage that credit score. What's the next type of debt you want to talk about? We talked about credit card debt. That's number one. What's number two? Yeah.

Can't say if we think it's more or less exciting, but that would be medical debt.

Yeah. Yeah, well, it's top of mind for a lot of people because it's become so expensive, right?

100%, yeah. I look at it very differently from credit card debt. First, we don't automatically put a medical bill on a credit card just to get rid of the medical bill, right? No, that's not a good idea at all. Yeah, that could potentially turn a bill that may have little or no interest into debt carrying a very high interest rate. So because of doing that, we should probably talk to a medical provider before doing that.

Yeah. What are some of the questions you would ask? Why do we need to talk to a medical provider?

Yeah, I think it's a good idea just to ask them things like whether you can set up a payment plan, if that payment plan could be interest free, whether there's financial assistance available, if there's a discount, if you pay a portion of it today, there's lots of questions you can get into. Okay. What other questions? Yeah. One surprising one is actually you can ask them, is the bill even correct, right? After insurance and everything's considered, it may not even be the right bill.

Yeah. Yeah. Because a lot of times they bill improperly, right?

Exactly. Yeah. Before aggressively paying off a large medical bill, I would say make sure you reviewed it without an explanation of benefits from your insurance company and confirm that the insurance was actually billed properly because those errors do happen. Don't assume that because a hospital sent you a bill for $3,000 that you unquestionably owe that $3,000. Verify it first.

Yeah, good advice. Yeah, I mean, wow, medical expenses nowadays. So, and medical debt, what about medical debt and your credit report?

Does that affect things? Yeah, this area has changed significantly in recent years, so it's important not to rely on old information. Three major credit bureaus voluntarily made changes that removed paid medical collection debt from consumer credit reports. They established a waiting period before certain unpaid medical collections appear and removed medical collection debt with an initial reported balance below $500. So there was also a federal CFPB rule that would have actually broadly prohibited medical debt from appearing on credit reports used by lenders. However, that rule was vacated by a federal court in July 2025. So you should not assume that all medical debt is now prohibited from appearing on your credit report.

Yeah. Yeah. And I know some state laws out there may provide some additional protections depending on where you live. What's what's the big point here regarding medical debt?

Yeah. You know, big point here is that medical debt may deserve different treatment from a 25 percent credit card balance. Suppose I owe $5,000 on an interest-free medical payment plan and $5,000 on a credit card at 24%. Assuming I'm current on both and there aren't any other complications, I'm probably not sending my extra money to the zero interest medical debt.

Yeah, yeah, there you go. That's probably true. You're attacking the credit card, right?

100%. Yeah, that's where the interest is doing the most damage. But don't ignore the medical bill. Stay current on any agreed payment arrangement. Understand the consequences of nonpayment. And I would say, let's make sure you know whether it could eventually be sent to collections. Sure. Sure.

And what's the third type of debt you want to talk about paying off? That would be your mortgage. Yeah. Well, that's a big one. Obviously, it's probably the biggest debt most people will have. So people think it's it's the worst, but not necessarily. Right.

Yeah. This one can be really controversial because people have strong feelings about mortgages. Some people tell me, I don't care what the math is. I want my house paid off. There's absolutely nothing, absolutely an emotional component to that. Imagine being 55 or 60 years old and waking up one morning knowing you don't owe anyone a penny on your house. That could feel fantastic. Eliminating a mortgage before retirement can significantly reduce the amount of monthly income you need. So I'm certainly not against paying off a mortgage early, but I would generally look at the mortgage after we've addressed high interest consumer debt.

Yeah. Yeah. And then there's a lot of math to it, because if you have a really low mortgage rate and your money could be sitting in, you know, you're an IRA or in the market making way more money or in another vehicle making more, you got a way that I would I would not do anything or make that decision without working with somebody like yourself, Daniel, or the team there at Summit. I think that's that's that's really good.

Yeah. Yeah. Suppose you have like a mortgage at 4%, car loan at 7%, credit card at 22%. If you have the extra money, my order would generally be credit card first, then the car load, and then just potentially the mortgage. That's simply following the interest rates.

Yeah. Are there tax considerations here?

Yeah, actually, indeed, for taxpayers who qualify and itemize deductions, home mortgage interest may be deductible subject to IRS rules and limitations. So that doesn't mean your mortgage is free and you should never keep a mortgage just because someone says, but you get a tax deduction. Yeah. You're still spending money on interest. Right. But the potential deduction can reduce the effective cost of the mortgage for some taxpayers. And I do want to add, just to remember, you generally have to itemize deductions to benefit from the mortgage interest deduction. So you don't automatically assume that because you have a mortgage, you're going to get a big tax deduction from it. You have to check your actual tax situation.

Yeah. Yeah. And I know you guys work on that with your clients and work alongside CPAs, things like that. With the standard deduction now being so much higher, a lot of people don't itemize. So you want to look at that. And what's an exception here for paying off debt?

Yeah, I mentioned this one just a little bit earlier in the show. Something that's really incredibly important to think about is not draining your emergency fund. Let's say you have $15,000 in savings and $12,000 in credit card debt. Should we take that $12,000 out of savings tomorrow and wipe out all the credit card debt? Maybe. But I don't necessarily want to leave ourselves with only $3,000 if that's nowhere near enough to handle an emergency. Because what happens when the furnace breaks, the transmission goes out, there's a job loss or a major medical expense comes up? You may end up putting the expense right back on the credit card that you just paid off. Yep. Yeah. So, yeah. Before aggressively paying down debt, I would generally want people to have an appropriate emergency reserve.

Yeah. Well, and that's true. So, I guess how much you need in that emergency reserve depends on your household and your personal situation, right?

You got it. Yeah. Someone with two stable incomes and low monthly expenses, they may need a different reserve than someone who is self-employed with a variable income and three kids. Yeah, the point is don't win the battle against debt and leave yourself completely defenseless against the next emergency.

Yeah, that's a great way to look at it. And I think a lot of people might miss that. What's another exception to paying off debt?

Yeah, one more I would just mention is get the employer match. There's one other place where I wouldn't blindly throw every available dollar at debt, your retirement plan. Suppose your employer matches part of your 401(k) contribution. You may not want to give that up. That employer contribution is simply because you have a mortgage or some other manageable debt. There can be a big difference between I have a three and a half percent mortgage and I have $20,000 of credit card debt at 28%. Yeah, yeah, I would say so. Yeah, with extremely high interest debt, your priorities may need to change, but I generally would not want someone accelerating a low rate mortgage while simultaneously giving up valuable employer matching contributions.

Yeah, the employer match is free money. You have to take advantage of it. You have to have some money in an emergency fund. Both great points that I'm glad you brought up. But you also have to get that high interest debt paid off as soon as possible. So it's a balancing act. And knowing what to do depends on your personal situation, as you mentioned. So I think this was a great show, Daniel. The key is work with a trusted financial professional on your overall financial plan, which paying up debt is just one part of, and it can tie into and affect other things like taxes. So how can our listeners and viewers out there get a hold of you and the team there at Summit Financial Consulting?

Yeah, the best way to contact us would be just via phone. That'd be 586-226-2100. You can also go visit us on our website. That'd be summitfc.net. All right.

Well, great show today, Daniel. A lot of great information. Obviously, especially as you get closer to retirement, you want to make sure you get as much debt paid off as possible. But do it in a smart, right, right way. You don't want to jeopardize your retirement future by dipping into retirement savings or your emergency fund. So it really does come down to having a plan. And again, listeners and viewers go to call 586-226-2100 or go to summitfc.net. And Daniel, Daniel Ludzinski. Really great to see you and have you host the show today. I'm sure you'll be back in the future, and we look forward to Ken coming back as well. But you did a great job. I think people are probably saying, Ken who? Out there, do you think they're saying that? Right, yeah. No, thanks for having me. I really enjoyed this. All right. Well, thanks, Daniel. And listeners and viewers, that does it for today's episode of Money Talks with Summit Financial Consulting, LLC. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.