Lump Sum to Pay Off Debt: Which Debts Go First?

Keep about two months of spending as cash, then send a lump sum to the debt that costs you the most. The exception is a 0% balance your monthly payments will clear before the promo ends. That one should not get the money, while a card about to jump to a high rate should. Here is a worked example.

A bonus, a tax refund or an inheritance lands in your account, and the obvious plan is "pay off debt." The hard part is which debt, and how much cash to keep. This guide works through one realistic example and explains the logic behind it. It is part of our look at an AI financial assistant that does the work.

Where should a lump sum go first?

Set aside a cash cushion, then pay the most expensive debt first. In plain terms, the debt with the highest interest rate costs you the most per dollar, so a dollar thrown at it saves the most.

Quill's debt planner follows this order for a one-time sum. It keeps about two months of typical spending as cash, then pays debts in the cheapest order, and shows the amount for each debt, the interest you save over 12 months and in total, and how many months sooner you are debt-free. This is not financial advice, and Quill moves no money. You make any payment on your bank's own site.

What does a $20,000 example look like?

These numbers are made up but realistic. Say your typical spending is $4,000 a month, so the cushion is $8,000. That leaves $12,000 of a $20,000 bonus to send to debt. Here are your debts.

Why does the 0% card come last?

Because it is the one debt the lump sum cannot help. Card B costs you nothing in interest today, and your regular payments will clear it before the rate changes. Money sent there saves $0 in interest.

Card C is the opposite trap. It looks free right now, but in 4 months about $4,400 will start costing 27.99%. A naive "highest rate first" ranking would skip it, because today it shows 0%. A planner that looks ahead pays it off first. This is why Quill searches the order of payments instead of just sorting by the current rate.

How does the $12,000 get split?

Here is the split for this example, in order.

1. Card C, $5,000. Clears it before the 27.99% rate arrives.
2. Card A, $4,000. Clears the 24.99% balance.
3. Car loan, $3,000. The leftover goes to the next most expensive debt, at 7.5%.
4. Card B and the mortgage, $0. Card B clears on its own. The mortgage is the cheapest debt, at 3.5%.

A rough, hand-done estimate of the interest this avoids over 12 months, ignoring your regular payments, looks like this.

This is our own arithmetic to show the shape of the answer, not a screenshot of the app. Quill works from your real balances and rates and accounts for your regular payments, so its figures will differ from this rough table.

Why keep two months of spending in cash?

Because paying debt down with every dollar leaves you one surprise away from putting it back on a card at 25% or more. A cushion of about two months of typical spending is the line Quill's planner uses. You may want more if your income is irregular or less if you have other savings. Our guide to debt snowball versus avalanche covers the ordering question when you have no lump sum, only a monthly budget.

What if you do not know a debt's interest rate?

Quill asks you instead of guessing. A debt whose rate is unknown is left out of the ranking, and the planner will not place it in an order it cannot justify. You can set a card's rate or minimum payment, which is a proposal that applies only when you click, and a backup is saved first.

How do you know the plan is right?

Quill checked its plans against brute force. On random test libraries, it compared its choice with every possible payment order, and its plan matched the best one. That does not make the result advice for your situation, but it does mean the ordering logic is not a rule of thumb.

The balances behind the plan come from your own statements, which Quill checks against the totals your bank printed on them. If you want to ask about a specific card first, see how to chat with your bank statements. The assistant can also run on your existing plan, as explained in using your ChatGPT or Claude plan to run your finances.

One privacy note. With AI on, the assistant sends the AI provider you picked a summary of your finances, which includes debts with their balances and rates. With AI off, none of your financial data leaves your computer.

So, where should you put a lump sum to pay off debt?

Keep a cushion, then target the debts that will cost you the most over the next year, not just the ones with the highest rate today. Skip any 0% balance your payments will clear in time, and go first for one that is about to jump. If you are unsure of a rate, find it before you choose.