Which Debt Should You Pay Off First?
Clear credit card and personal loan debt before you invest: pay the minimum on everything and put every spare rupee on the highest rate first, which is usually the card. Moving card debt to a personal loan at roughly 10–16% cuts the cost straight away.
The reason is the interest rate. At 18% per annum, a personal loan doubles approximately every 4 years. A credit card balance at up to 45% a year (3.75% a month at SBI Card, per its terms as of September 2026) doubles in about 19 months if you pay nothing, and paying only the minimum barely dents it.
Before you invest a single rupee in SIP or any market-linked instrument, high-cost debt must be treated as a financial emergency. No market return consistently beats an 18–45% guaranteed "return" from debt repayment.
Step 1: List All Your Debts (The Full Picture)
Start by creating a complete inventory:
| Debt Type | Outstanding Amount | Interest Rate | Min Monthly Payment |
|---|---|---|---|
| Credit Card 1 | ₹80,000 | 36% p.a. | ₹4,000 |
| Personal Loan | ₹3,00,000 | 18% p.a. | ₹8,500 |
| Buy Now Pay Later | ₹25,000 | 24% p.a. | ₹3,000 |
List every debt: personal loans, credit cards, BNPL apps (Simpl, LazyPay, etc.), outstanding EMIs on gadgets. Include the exact interest rate, because that decides the order in which you pay them off. If one of them is a car loan, the car loan EMI calculator shows how much interest is still left.
Step 2: Choose Your Payoff Strategy
Strategy A: Debt Avalanche (Mathematically Optimal)
Pay minimum amounts on all debts. Throw every extra rupee at the highest-interest debt first. Once it's paid off, attack the next highest. This saves the most money in interest over time.
Strategy B: Debt Snowball (Psychologically Optimal)
Pay minimum amounts on all debts. Throw every extra rupee at the smallest balance first. Quick wins motivate you to stay the course. Choose this if you've struggled with debt payoff motivation in the past.
For most Indians: Use the Avalanche method. Credit card debt (36% in the example above) is almost always the highest rate and should be attacked first regardless of balance size.
Step 3: Free Up Extra Cash for Debt Repayment
The speed of debt payoff depends on how much extra you throw at it beyond minimums. Find the money:
- Pause non-emergency SIPs temporarily: it is mathematically correct to pause a 12% return SIP to clear a 36% credit card debt
- Sell idle assets: old gadgets, gold jewelry pieces not worn in years, unused subscriptions
- Use annual bonus entirely: putting one year's bonus into debt can take months off your payoff timeline
- Cut discretionary spending hard: OTT, dining out and shopping, for a fixed period until the debt is gone. Splitting your take-home pay with the 50/30/20 budget rule shows how big your "wants" bucket really is, and that is the money to redirect.
Step 4: Reduce the Interest Rate
While paying off, aggressively work to reduce the interest rate itself:
- Balance transfer to 0% or lower-rate card: Many banks offer 0% EMI balance transfers for 3–6 months
- Personal loan to consolidate credit card debt: A personal loan at roughly 10–16% for a good credit profile (SBI 10.00–15.00%, HDFC Bank from 9.99%, September 2026) is far better than a credit card at up to 45% a year
- Negotiate with your bank: If you have a long relationship with your bank and good repayment history, ask for a rate reduction
- Top-up on home loan: If you have home equity, a home loan top-up (usually priced a little above your home-loan rate) to clear high-cost debt makes mathematical sense, as long as you don't run the card up again
What to Do After Debt Is Cleared
The moment your last high-cost debt is paid:
- Build a 3-month emergency fund, so you never need to use a credit card for emergencies again
- Restart your SIP, and increase it by the exact amount you were paying toward debt
- Use credit cards for convenience only: pay the full bill on time every month
Paying off high-cost debt earns you a guaranteed return equal to its interest rate. Clearing a 24% loan is a 24% return, which no equity SIP can reliably match.
Related Reading
- How to Improve Your CIBIL Score: The Practical 6-Month Plan: once you're debt-free, rebuild your credit score so future loans cost less.
