NEW YORK (MONEY Magazine) - Like many baby-boomer couples raised in an era of easy credit, Tom and Audrey Dyjak have managed to charge themselves into a black hole of debt.
Audrey, a nurse, and Tom, a horticulturist, have four credit cards with a combined balance of about $12,000 and two home-equity lines of credit totaling about $70,000 (used to consolidate higher-rate debt), as well as a $120,000 mortgage.
Although the Ludlow, Mass. couple earn a healthy $95,000 a year, their hefty debt load is straining both their budget and their marriage as they argue about how to get their finances back on track. Says Audrey, "I am financially drowning and emotionally drained."
Paying off their debts is, rightly, the Dyjaks' top financial priority. But figuring out which loans to tackle first is a conundrum in itself.
As Audrey says, "I feel like I'm just spinning, not sure where my money will make the biggest difference."
The dilemma is a common one for families struggling to repay a variety of loans: Should you pay your credit cards first, and in what order, or are you better off putting extra money toward, say, your mortgage or car loan? Or would it be even smarter to put extra cash into savings?
To help prioritize, consider these factors.
The cost of your debt
Credit cards are generally more expensive than car loans, which are pricier than tax-deductible mortgages, which in turn cost more than deductible student loans. So it's typically in your interest to pay off debts in that order.
Your credit score
Choose which cards to pay first in a way that will help raise your credit score.
Your best bet: Pay the cards with the biggest balances relative to your credit limit first rather than the ones with the highest rates.
This will improve your "utilization ratio," a number that tells lenders how much of your available borrowing power you've tapped and accounts for 30 percent of your score. The closer you are to your limits, the greater the perceived risk that you will not pay on time.
Your cumulative minimum payments
If you have cards with small balances (hundreds, not thousands of dollars), consider paying them off in full.
That way, you're no longer making nuisance payments each month for cards you don't really use, and you free up cash that you can use to pay other debts, says Edina, Minn. financial adviser Ross Levin. You also get the psychological boost of crossing a bill off your repayment list.
With credit-card rates averaging 13.8 percent recently, it's tough to beat the return on paying off your plastic. Once you've wiped your Visa slate clean, however, and still have low-rate car, home and student loans, you may find it better to invest any extra money you have than to retire your remaining debt at a faster than required pace.
In comparing the alternatives, bear in mind that the money you save by paying off a loan is equivalent to a guaranteed return, while there's no assurance that a stock mutual fund, say, will make any money at all.
But if you hold a stock fund for five years or more, the historical odds are good that it will pay you more in the end than you'd save in interest payments on your loan.
Putting your money in a fund also gives you access to it for emergencies; you don't have that option if you've already used the money to erase debt.
Clearly, Audrey and Tom Dyjak aren't at this point yet. But by focusing on their high-rate debt first, they can see ahead to a time when they will be.
"We've thrown away a lot of money over the years," says Audrey. "But now we're tackling our problems one step at a time."
Editor-at-large Jean Chatzky is the author of the new book "Pay It Down!" (Portfolio).