Tips for Paying Off Debt

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The best tips for paying off debt quickly are simple and commonsense — make a budget, reign in spending and put any extra money toward your debts. But if debt has been a struggle, those steps might seem complex. Keep reading to learn how to get started and choose the best budget tips for paying off debt as quickly as possible.

How does debt build up?

Whether it’s credit cards, student loans, escalating health premiums, medical bills, car payments, mortgages or other loans, debt can accumulate quickly. At the core of it, though, many of these debts are the result of bigger financial issues. Do you manage your money each month? Is overspending a problem? Do you have savings you can access in case of an emergency or unexpected bill?

You can’t control every situation. But debt generally builds up over time, small and slow, until suddenly the total seems insurmountable. According to ValuePenguin research, the average American household credit card debt is $5,700. If we look at just households carrying a credit card balance, the amount is $9,333. It’s not hard to see why getting out of debt can feel overwhelming — but it doesn’t have to be.

Top tips for paying off debt

So where do you start? Keep in mind that you didn’t get into debt overnight, so you won’t get out of debt overnight either. It requires a strategy and determination. Here are some tips you can follow to help you reduce your debt.

Educate yourself

If your money management skills could use some improvement, consider taking a personal finance class or reading a book about money management. Changing your mindset and better educating yourself about finances and debt may help you break the spending cycle. Once you get out of debt, you want to make sure you don’t end up right back where you are now.

Create a budget

Before you start paying off your debt, it’s important to create a budget of your income and expenses so you have a clear picture of your current situation. Make adjustments to your budget when you pay off a debt, increase your income or have any other type of financial change.

At a basic level, a budget is just a list of your regular debts and expenses alongside a list of your income. If you are making a budget for the first time, it’s important to try and document all the places your money is spent.

Your budget should include:

Your regular debts, including the monthly amount owed, dates due and total balance. Beyond monthly, consider adding expenses that are quarterly or annual as well. Budgeting for them over the year can help prevent a surprise expense from cropping up:

  • Rent or mortgage
  • Transportation
  • Utilities
  • Insurance
  • Alimony or child support
  • Medical expenses
  • Food
  • Clothing
  • Loans
  • Credit card payments
  • Club memberships
  • Gas
  • Insurance premiums
  • Property taxes
  • Car registration and inspection
  • Miscellaneous

Your income:

  • Your salary, a spouse’s salary
  • Any investment dividends you receive regularly
  • Savings accounts
  • Money market accounts
  • Any other investment income

Now add up your monthly income and subtract all of your monthly expenses. Do you have money left over, or are your expenses eating away at your income? If you have more month than you do money, now is the time to do some troubleshooting. That troubleshooting can go a couple ways: either find places to reduce your spending or find ways to increase your income.

Identify places to cut spending

If you do not have any extra money to put toward paying down your debt, consider cutting some of your expenses. For example, if you average around $800 for food each month for a family of three, consider reducing that. Eat at home more often, compare prices at the grocery store, buy on sale and learn how to make less expensive meals. Use that extra cash to put toward your debt.

Besides food costs — which are some of the biggest budget-busters — look at cutting or reducing anything that isn’t essential. For example, you likely can’t do anything about the cost of electricity or gas, but you can focus on using less. You can also cut cable or drop subscriptions. It doesn’t mean you can never have those things again. However, you need to free up as much money as possible for debt repayment now. In the future, you can reassess what fits in your budget.

So how do you know where you’re spending? And how do you continue to track spending each month? It depends on your personality and preference. Most importantly, choose something that will work for you. It can be as simple as a notebook, a dedicated note on your smartphone or a computer spreadsheet. Alternatively, you can use a smartphone app or website. These often do a good job of categorizing your spending, sending alerts when you overspend and creating visuals to make it easy to understand. Some of the most popular are:

No matter what you decide to use, make sure you use it correctly and regularly to get the most benefit.

Explore ways to bring in more money

In addition to cutting spending, you could work to increase your income, including:

  • Taking an additional job
  • Job-training to improve your marketable skills, potentially leading to a raise or a more lucrative position
  • Asking for additional hours at your current job
  • Selling things you no longer use or need

Once you’ve established your budget so you have extra money at the end of the month, you can use it to start chipping away at your debt.

Choose a repayment strategy

There are two popular repayment methods — debt snowball and debt avalanche— that can be used to pay off debt. Let’s take a closer look at each method to help you decide which is the best one for you.

Debt snowball method

With the debt snowball method, you use any extra money to pay off your smallest balance first. It’s a great confidence booster to see a debt paid in full and will provide inspiration to continue toward your financial goals.

Debt avalanche method

The debt avalanche repayment system is a strategy that pays off the debt with the highest interest rate first, even if that debt has the smallest amount owed. Once that debt is paid in full, take that money and add it to the next most expensive debt until that’s paid off, and so forth. It might take a little longer to bring down your debt, but you’ll save more money in the long run by eliminating the highest-interest debt first.

Make extra payments

If you have a windfall of extra money — such as a work bonus, income tax refund or a monetary birthday gift — consider putting it toward your debt repayment goal. Use it to make an extra payment on your credit card or loan — every little bit helps.

Debt consolidation

Depending on your credit score and credit history, you may be eligible for a debt consolidation loan. These types of loans are issued as a lump sum payment and are repaid over a set period of time. Once you’re approved, you use the loan proceeds to pay off other debts, such as credit card or medical debt.

Ideally, you’ll be able to qualify for a loan that carries a lower interest rate than the rate on the debt you are looking to consolidate, so you should ultimately save money. Keep in mind that your debt consolidation loan may come with an origination fee, which may range from 1% to 6%. You also want to be careful that you don’t start using credit cards that you just consolidated and end up back in the same financial hole all over again.

Additionally, debt consolidation is best if you can reasonably pay all your debt obligations but would like to save a little in interest. If you are struggling to make payments currently, you may want to consider other options to reduce the amount you owe.

Refinance loans

Look into each of your loans and credit cards and consider ways to save money. For example, can you refinance your mortgage or home equity loan to a lower interest rate and, therefore, a lower payment? If you have been a good customer, perhaps you can ask your credit card company to lower your interest rate, even for a few months. Any extra money saved each month can be put toward your debt.

Debt relief and credit counseling

If those reductions in interest rates aren’t enough, you might want to seek guidance from a credit counselor or credit counseling agency. Most counselors will look at your entire financial situation and help you devise a plan. This could include working with your creditors to develop repayment plans that may have lower interest rates, lower monthly payments or waived fees. There are consequences to this type of plan, though. For example, you might become ineligible to open any new credit cards. Make sure to research your options and different agencies before deciding on this method.

How to avoid the debt trap

There are some cases where debt is unavoidable or simply necessary, such as medical bills stemming from an emergency procedure or taking out a loan to cover college tuition.

That being said, there are steps everyone should take to avoid taking on unnecessary or avoidable debt. Building an emergency fund is one of the first strategies in your control to prevent debt from piling up. Aim to set aside three to six months of living expenses in a savings account. You can dip into that fund to cover unexpected expenses instead of needing to turn to debt.

Apart from saving in advance, keeping your spending under control is next on the list. Establish your budget and then follow it. Only borrow money you can afford to pay back and don’t overextend yourself. For example, you need a car and can afford a monthly payment of $200. Don’t buy or lease a car that exceeds that, no matter how you justify the purchase.

Most importantly, curtail unnecessary spending. No more charging things you don’t need. If you don’t have cash to pay for it, don’t buy it.

How much debt is too much debt?

If you’re already struggling to pay your bills and do not have enough money at the end of the month, it’s likely that you already have too much debt. However, as a general rule, your total debts, excluding a mortgage and other home costs, shouldn’t be more than 28% of your take-home pay — that’s the amount after taxes are taken out. Depending on your financial situation, your income and your ability to handle your finances, it can fluctuate.

Once you’ve achieved your goal, make sure you stick to your budget, do not spend money unnecessarily and, this time, put your extra money toward your next financial goal — perhaps funding a bigger savings account, retirement fund or a much-needed vacation.

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