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.
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.
List your debts from smallest to largest amount. Make minimum payments on each debt, except the smallest one. Use all extra money to pay off your smallest debt first. Repeat process after paying off each smallest debt.
The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.
Capacity: This refers to someone's ability to pay back the debt. For a lender, it's important to know if a person has been consistently employed in a job that provides adequate revenue to sustain their credit utilization. An individual's company's capacity to repay loans is the most crucial of the five factors.
Bad debt can be reported on financial statements using the direct write-off method or the allowance method. The amount of bad debt expense can be estimated using the accounts receivable aging method or the percentage sales method.
By making a credit card payment 15 days before your payment due date—and again three days before—you're able to reduce your balances and show a lower credit utilization ratio before your billing cycle ends. That information is reported to the credit bureaus.
To pay off $2,000 in credit card debt within 36 months, you will need to pay $72 per month, assuming an APR of 18%. You would incur $608 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
Credit card refinancing can help you pay off $5,000 in credit card debt much faster because a personal loan comes with a predetermined end date. Debt consolidation loans allow you to combine multiple debts into one loan. Some lenders will even send your loan funds directly to your former creditors.
To pay off $40,000 in credit card debt within 36 months, you will need to pay $1,449 per month, assuming an APR of 18%. You would incur $12,154 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
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