Having more than one type of debt is common, and this is especially true after you graduate college and start your first “real job.” You may have credit card debt, an auto loan, and a mortgage payment to make after you buy your first home. It's also common to have other incidental debts to cover, including student loans.

If you're like many who took out loans during college, you'll likely pay them off after you graduate. In fact, 82% of students who have taken out loans expect to make payments after graduation, according to a recent one. Student Loans College Ave the survey.

That said, you'll want to make sure you're balancing paying off debt with your savings goals along the way.

You'll also want to make sure you are repayment of debts in the optimal order, or in a way that will help you save as much money in interest as possible while matching your goals. Which debts should you pay off first? Here's an overview of how to get the best results:

1. Pay off high interest debts

No matter what types of debt you have, credit card debt should be your first priority. Why? Because credit card debt is likely the most expensive debt you'll ever have.

Federal Reserve data shows that the average credit card interest rate for rated interest accounts came in at around 22% as of May 2023, however your credit card could easily charge higher than average fees.

To save as much money as possible, you should try to pay off as much of your high-interest credit card bills as possible each month. You can also pay off credit card debt faster with the help of a debt consolidation loan or a 0% APR balance transfer credit card.

2. Other unsecured debts

Other unsecured debts such as personal loan debt should come next in the order of debt repayment. After all, unsecured debts tend to have higher interest rates than secured debts like auto loans. Actually, The Federal Reserve also announced that the average interest rate for a 24-month personal loan was 11.48% in May 2023, compared to the average rate of 7.81% for a 60-month auto loan.

Ideally, you'll start paying more on personal loan debt and other unsecured debt after all credit card debt is paid off in full, although you should make at least the minimum payment on all your bills throughout the process.

3. Next Up, Student Loans

The next debt you'll want to tackle is student loans. I suggest focusing on these loans after other unsecured debt, as federal student loans (and many private student loans) come with low fixed interest rates and monthly payments that won't change over time. If you have federal student loans, you may even want to look income-driven repayment plans.

If you're hoping to pay off your student loans faster or just want to save money on interest, you might also consider it refinancing your student loans to get a shorter repayment term, a lower monthly payment, or both. Just remember that refinancing federal student loans may mean losing access to income-driven repayment plans and federal protections like deferment and forbearance.

4. Remaining debt

Once you've paid off or substantially paid off all of your other debts, you can focus your efforts on the secured debts you have, such as mortgages and car loans. These debts should be tackled last as they are secured by collateral and tend to offer lower interest rates as a result. For example, you might consider paying more than the minimum on your mortgage, a car loan, or both until they're paid off in full.

Then again, you may want to pay off extremely low interest rate debt as slowly as possible to free up more cash flow for living expenses and investments. If you got a mortgage in January 2021 when the average interest rate on a 30-year fixed-rate home loan was as low as 2.65%, for example, it makes sense to make the minimum payment on that debt and invest your extra money.

Other financial considerations

It's important to make sure you balance debt repayment with other financial considerations. After all, focusing too much on paying off debt early in life can leave you behind when it comes to investing for retirement or saving for a first home.

While you'll want to eliminate credit card debt and other high-interest debt as soon as you can, even if you have to stop saving and investing for a while, you can still pay off student loan debt and secured debt. at a slower pace as we save and invest for the future along the way.

Finally, make sure you have adequate emergency savings throughout your debt settlement journey, or for you to start saving for emergencies as soon as you can. Without a fully funded emergency fund, you may end up relying on credit cards and other loans to get you through and derail your debt settlement progress in the process.

How much should you save? While most experts recommend having an emergency fund that can cover three to six months of expenses, it's good to start small if you have to.

Final Thoughts

Having more than one type of debt is how it works for most people, especially when you're young and in the early stages of your career. However, when it comes to paying it off, you need to make sure you have a concrete plan that can help you lower your interest charges and get you where you want to be.

Focusing on credit card debt and other unsecured debt first always makes sense, as these debts are not secured by an asset and tend to charge much higher interest rates. You can then focus on student loans, followed by other secured debt you have such as a home loan or car loan.

In the meantime, make sure you have an adequate emergency fund and invest in it for retirement. After all, debt won't last forever if you're serious about paying it off, and saving and investing early can help you take advantage of compound interest and avoid using credit cards for unexpected expenses. Creating a budget to track these factors is your best bet.

If you need help creating one, or just don't know where to start, use this the budget worksheet as your guide – you will achieve financial freedom in no time.