Guide
Which debt should you pay first when you can't pay everything?
By Mike Mulik · Published · Updated
I design digital products and build free tools. Not a financial advisor, what that means.
Most advice about paying off debt assumes you can cover all your minimum payments and have something left over. Then the question is just where to aim the extra money, and the answer is usually your highest interest debt. That's what the calculator is built around.
This page is about the other situation. The one where the money doesn't stretch far enough and you have to choose which bills go unpaid this month.
If that's where you are right now, take a breath. This is more common than you'd think, people get through it, and there's a logical way to work out what to do. It's just a completely different logic than the interest rate one.
Because when you can't pay everyone, the question stops being what costs me the most and becomes what can this creditor actually do to me.
Two words worth knowing
Secured debt is debt attached to a thing. Your mortgage is attached to your house. Your car loan is attached to your car. Miss enough payments and the lender can take the thing.
Unsecured debt isn't attached to anything. Credit cards, most personal loans, medical bills. If you stop paying, the lender can damage your credit, chase you, and eventually take you to court. But there's no specific object they can just come and collect.
That difference is most of what decides the order below.
The order
First: anything that keeps a roof over you, heat on, and you able to get to work.
- Rent or mortgage. Losing your home is not comparable to any other financial problem. Pay this first, always.
- Utilities, especially heat if you're somewhere with a real winter. Many places have rules preventing winter disconnection, but don't rely on that.
- Your car, if you need it to earn money. If you don't need it to earn money, it may belong lower down the list, or it may be the thing to sell.
- Basic food and essential medication. These aren't debts, but they come before debts.
Second: things where someone has powers ordinary lenders don't have.
- Taxes. Tax agencies can generally take money from your pay or your bank account without going to court first, which regular creditors can't do. Owing tax is not something to leave sitting.
- Child support or alimony. Consequences for falling behind can be severe and go beyond money, depending on where you live.
- Any debt where a court has already ruled against you. Once there's a judgment, the situation has changed and it needs attention.
Third: other secured debts, for things you'd struggle to replace.
Last: unsecured debts. Credit cards, personal loans, store cards, medical bills, old accounts already in collections.
Yes, that's your most expensive debt at the bottom of the list. That's not a mistake. A 27% credit card is the most expensive debt you have, and it's also the one that can do the least to you this month.
What this really comes down to
Here's the sentence I'd want someone to take away from this page.
Falling behind on a credit card damages your credit. Falling behind on your rent can make you homeless. Both feel urgent when the letters arrive, but they are not the same size of problem.
Debt collectors are, professionally, very good at making their bill feel like the most urgent one you have. That's the job. It doesn't make them right about where they sit on your list.
What actually happens if you miss an unsecured payment
People imagine something dramatic and immediate. The real timeline is slower than that, and knowing it helps you make a calm decision instead of a panicked one.
| Roughly when | What generally happens |
|---|---|
| Straight away | A late fee. Your interest rate may go up. |
| 30 days late | It gets reported to the credit bureaus. This is the first real damage. |
| 60 to 90 days | More fees, more calls, more letters. |
| 120 to 180 days | The lender writes the debt off and usually sells it to a collection agency. |
| After that | The collection agency chases you. Sometimes they sue. If they win, they may be able to take money from your pay, though the rules vary a lot depending on where you live. |
None of that is good. But notice that the first month costs you a fee and a mark on your credit report, not your home or your car. When you're choosing between rent and a card payment, that's the comparison that matters.
Do this before you miss anything
This is the most useful thing on this page, and hardly anyone does it.
Call your lenders before you fall behind, not after.
Almost every large lender has a hardship program. Reduced payments for a few months, a pause, interest frozen, fees waived. These programs are real, they're often not advertised, and the person on the phone usually has more room to help you than you'd expect.
They're also much more willing to help someone who calls ahead than someone they've been chasing for three months. Say plainly that you can't make the next payment and ask what options they have. You don't need to explain yourself in detail or apologize.
A few specifics worth knowing:
- Student loans often have the best options of anything you owe. In the United States, federal loans have income based repayment plans that can drop your payment substantially, sometimes to zero, and deferment for hardship. Canada has the Repayment Assistance Plan. Private student loans generally have much less flexibility, so check which kind you have.
- Medical bills, in the United States, are frequently interest free and very often negotiable. Hospitals have financial assistance programs, and many will set up a long payment plan at no cost. There are also now some limits on when medical debt appears on credit reports. Ask before you put a medical bill on a credit card, because moving it onto a card turns a 0% debt into a 23% one.
- Mortgages have more options than people realize, including forbearance and modification. Call the servicer early. This is one where waiting is genuinely costly.
Two things not to do
Don't borrow from a payday lender to cover a bill. Rates on these are often the equivalent of several hundred percent a year. It converts a bad month into a much worse year, and it's the single fastest way to make a difficult situation genuinely unmanageable.
Be careful with companies advertising debt relief or debt settlement. Some are legitimate. Many charge substantial fees for something a nonprofit agency will help you with for free or close to it. If someone asks for a large payment up front, promises to make your debt disappear, or tells you to stop talking to your creditors, walk away.
When to get actual help
If your required minimum payments are more than your income can cover, that isn't a budgeting problem you can think your way out of. It's a structural one, and there are people whose entire job is to fix it.
In Canada: a Licensed Insolvency Trustee, or LIT, is federally regulated and the only person who can file a consumer proposal or bankruptcy. The first consultation is free and carries no obligation. Credit Counselling Canada member agencies are nonprofit and also worth a call. There's more detail in consumer proposal vs. bankruptcy.
In the United States: look for an agency accredited by the National Foundation for Credit Counseling, or NFCC. Nonprofit, and the initial session is typically free.
Both can set up a debt management plan, which is a different thing from a loan. They negotiate with your creditors, often getting interest reduced or stopped, and you make one payment to the agency. You're not borrowing anything.
Going to see one of these people is not an admission of failure and it doesn't commit you to anything. Most report that clients wish they'd come in a year or two earlier, when there were more options on the table.
When things settle down
Once you're covering all your minimums again with something left over, the interest rate logic comes back and it's the right way to think. Then it's worth putting your numbers into the debt payoff calculator to see your debt free date, and reading snowball vs. avalanche to pick an order.
But not yet. Right now, the order is roof, heat, transport, then everything else.
Frequently asked questions
Which debt should I pay first if I can't pay them all?
Housing first, then utilities, then your car if you need it for work. After that, anything where the creditor has unusual powers, like taxes or court ordered support. Unsecured debts like credit cards come last, even though they usually have the highest interest rates, because they can do the least to you in the short term.
Should I pay my credit card or my rent?
Rent. A missed credit card payment costs you a late fee and a mark on your credit report. A missed rent payment can eventually cost you your home. They're not comparable, however aggressive the card company's letters are.
Is it better to pay the highest interest debt first?
When you can cover all your minimums, yes, that's usually the cheapest approach. When you can't cover your minimums, interest rates stop being the right guide, and what each creditor can actually do to you matters more.
What happens if I just stop paying a credit card?
A late fee immediately, then a report to the credit bureaus at around 30 days, which damages your credit for years. Somewhere between four and six months the lender typically writes the debt off and sells it to a collection agency, who will keep pursuing it and may sue you. The debt doesn't go away on its own.
Will my lender actually work with me if I call?
Often, yes, more than people expect. Most large lenders have hardship programs offering reduced or paused payments, and they're generally much more helpful to someone who calls before missing a payment than someone they've been chasing. It costs nothing to ask.
Should I put a medical bill on a credit card?
Usually not, at least not in the United States. Medical bills often carry no interest and are frequently negotiable, and many providers offer long payment plans for free. Moving one to a credit card converts an interest free debt into an expensive one. Ask the provider about financial assistance or a payment plan first.