Photo illustration by Sarina Finkelstein for MONEY; Getty Images (2)
By Ethan Wolff-Mann
May 24, 2016

It’s staggering: eight in 10 Americans are in debt. According to NerdWallet, the average household is in the hole to the tune—or dirge—of over $130,000. It’s a massive burden that snowballs from a variety of sources.

Of course, not all debt is equally dangerous. Some debts are investments of sorts: a college degree for a better-paying job, a house near a good school for the kids, a car to get you to the job that pays for it all.

But with a myriad of debts all demanding attention, it can be hard to know which ones to tackle first. Here are a few strategies to consider.

Hit the high-interest-rate debts first

Credit cards are very expensive ways to borrow. The average interest rate (APR) for a cash-back rewards card is around 17%, according to Bankrate, but many people get saddled with much higher rates.

Say you’re carrying a $5,000 balance at an 18% interest rate, and you typically pay $200 a month. Paying just that amount, it will take you more than 11 years to pay off the balance, and you would spend almost $2,900 on interest alone! And if you pay even less per month—the common minimum of 1% of the balance plus the interest—you would spend 23 years paying it off at a cost of almost $7,000 for the privilege of borrowing that $5,000.

Taking care of the high-interest debts first means paying far less in interest and tackling the principal instead. A $1,000 payment toward a credit card balance will do a lot more for your bottom line than trying to chip an extra $1,000 off your mortgage. Plus, paying off unsecured debt, like credit cards and bank loans, may have mental-health benefits for your kids.

Devise a plan and stick with it

The traditional school of thought is to tackle revolving high-interest debt first because it’s so expensive—but it’s not the only school of thought. For some people, this approach ignores the vital psychic boost you can get from making some debts disappear all together.

Paying off the smallest debts first is another method—some call it the “Momentum Method” because it lets you gather emotional steam as you conquer your debts. It may cost you more in the long run, but it’s a legitimate strategy if it helps you to stick to your goals.

In extreme cases, consider dipping into your 401(k)

It can be tempting to borrow from your 401(k) savings account to pay off expensive credit card debt, which is something some plans allow. According to NerdWallet, it can sometimes be a good idea if you’re paying extremely high credit card interest rates, since the 401(k) loan rate would be much cheaper, and you would be paying the interest and principal back to yourself. But doing so defeats the purpose of the 401(k) as a retirement savings account. Still, you are getting a guaranteed return equivalent to the high interest rate you’re paying. The bottom line: Proceed with extreme caution, and only consider it if your interest rate is sky-high.

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