If you have debt, you’re not alone. The average American carries more than $100,000 in debt.1 That existing debt load means unexpected expenses such as medical bills can be a tipping point into financial insecurity.2And if you have too many payments every month, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account.
One place to start? Try to make progress every month on reducing your debt. It takes a little organization up front, plus a strategy that fits your budget and your preferences. These steps can help—including three specific, practical strategies to pay down or pay off your debt:
Make a list of all your debt.
Before you start paying off debt, tally how much debt you have. Make a list with this information for each bill you owe.
The details you need to know about every debt:
- Debt name/account
- Type of debt (credit card, student loan, etc.)
- Balance
- Interest rate (some debt is more expensive, i.e., has a higher interest rate, than others)
- Payment terms/length
- Minimum monthly payment
Figure out the maximum you can pay every month.
Review your budget and answer these questions:
- How much do you need to pay for necessities such as rent/mortgage, insurance, utilities, and food?
- How much do you currently pay each month toward debt?
- Can you temporarily trim a few budget items to put even extra toward debt?
- Any extra income—tax refund, side hustle, things like that—to put more toward debt?
The 50/30/20 approach3 simplifies budgeting:
Trim from “wants” and a little from “needs” (i.e., a lower streaming bill) to come up with the total you can put toward debt repayment each month.
What’s the best way to pay off debt?
You can choose a debt repayment plan tailored to your unique circ*mstances— what’s best for you. In general, there are three strategies that can help you pay down or pay off your debt more efficiently.
| What it’s called | How it works | How you keep it going | Why some people like it |
|---|
| 1. The snowball method | Pay the smallest debt as fast as possible. Pay minimums on all other debt. | Then pay that extra toward the next largest debt. | A quick payoff is a quick win and can be a confidence booster. |
| 2. Debt avalanche | Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. | Then pay that extra toward the next smallest debt. | Paying off a big debt can boost a feeling of control and gets rid of big interest, too. |
| 3. Debt consolidation | Combine debts into a single account. | Avoid any other debt until post-payoff | Possible lower interest and one account increases focus. |
Celebrate success and stay on top of future debt.
Sometimes debt can be good to help you build a credit score or accomplish goals—such as buying a house—that would be hard to do without a loan. But lots of extra debt can weigh down your credit score and add up to interest you didn’t want to pay. So celebrate every extra payment—and every debt payoff, too.
What's next?
As you manage your debt, talk to a financial professional about your long-term retirement savings strategy. If don’t already have a financial professional, we can help you find one.
FAQs
Consider these three common methods for paying off debt: debt consolidation, snowball strategy and avalanche strategy. These are best used to pay off high-interest non-mortgage debt such as credit cards, but can be used for other loans as well.
What are the 3 biggest strategies for paying down debt? ›
Consider these three common methods for paying off debt: debt consolidation, snowball strategy and avalanche strategy. These are best used to pay off high-interest non-mortgage debt such as credit cards, but can be used for other loans as well.
How can I pay off my debt? ›
Making more than your required minimum payment can help you pay off debts more quickly and save money in interest charges. Earmark unanticipated funds, such as your tax return or a bonus, for debt payments. You can also find extra money in your monthly budget by reducing your discretionary spending.
What is the first of three steps to start paying off your debt group of answer choices? ›
List your debts from highest interest rate to lowest interest rate. Make minimum payments on each debt, except the one with the highest interest rate. Use all extra money to pay off the debt with the highest interest rate. Repeat process after paying off each debt with the highest interest rate.
What are three ways to avoid debt? ›
How to avoid debt
- Pay bills on time.
- Start an emergency fund.
- Pay with cash.
- Strategies for paying down debt.
Pay off your most expensive loan first.
Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the “avalanche method” of paying down debt.
How to pay debt off quicker? ›
Make minimum monthly payments on all debt, except for the highest interest rate. Pay extra towards the debt with the highest interest rate. Once you have paid off debt with the highest interest rates, start paying more on the next highest interest rate.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Which strategy pays off debt the cheapest? ›
With the debt avalanche method, you pay off the high-interest debt first. With the debt snowball method, you pay off the smallest debt first. Each method requires you to list your debts and make minimum payments on all but one.
How can I remove myself from debt? ›
You cannot remove yourself from debt review, but you can get a registered Debt Counsellor to do so. They will do this by issuing you with a debt review clearance certificate. However, you first need to meet one of the following criteria: All your debts have been paid up.
5 Effective Debt Management Strategies
- Rework Your Business Budget.
- Improve Your Cash Flow.
- Review and Prioritise Your Debts.
- Review Loan Terms & Consider Refinancing.
- Increase Your (Profitable) Sales.
U.S. Household Debt Is at an All-Time High
This includes mortgages, home equity revolving debt, auto loans, credit cards, student loans and other consumer lending such as retail cards. The total household debt of $17.3 trillion entering 2024 is a new high for the U.S.
What is the best way to settle debt? ›
Consult a Credit Counselor
- Determine If Negotiation Is Right for You.
- Set Your Terms.
- Tell the Truth and Keep a Consistent Story.
- Learn Your Rights Under the Fair Debt Collection Practices Act (FDCPA)
- Keep Detailed Communication Notes.
- Negotiate with Creditors Directly.
- Get All Agreements in Writing.
7 steps to more effectively manage and reduce your debt
- Take account of your accounts. ...
- Check your credit report. ...
- Look for opportunities to consolidate. ...
- Be honest about your spending. ...
- Determine how much you have to pay. ...
- Figure out how much extra you can budget. ...
- Determine your debt-reduction strategy.
You can refinance mortgages, auto loans, personal loans and student loans. One way to do this is through a debt consolidation loan, a personal loan that may come with lower interest rates than your existing debts. You may also consider transferring the debt to a balance transfer card if you have credit card debt.
What debt should you avoid? ›
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
What is the smartest way to pay down debt? ›
Prioritizing debt by balance size.
This strategy, also called the snowball method, prioritizes your debt payments from smallest to largest. You'll continue to pay the minimum on all of your debts while focusing the majority of your repayment efforts on your debt with the smallest balance.
What are the 5 golden rules for managing debt? ›
1. Spend less than you make
- Pay yourself first (i.e. as soon as you get paid, transfer a little bit of money - it could be $20 - to your savings account before spending anything)
- Create a budget.
- Increase your income.
- Cancel unused subscriptions.
- Consider refinancing high interest loans.
