How to pay off debt

Understanding debt and strategies to pay it off

It’s all too easy to rack up debt — a dinner here, concert tickets, student loans, travel, medical expenses, and more. In fact, research shows for the average American, personal debt climbs higher with each decade. It doesn’t have to be this way — with strategy and a bit of discipline, you can reduce your debt and pay it off. 

What is debt?

The simple definition is anything owed to someone else is considered debt like the following:

• personal loans
• car loans
• student loans
• medical debt
• payday loans
• credit cards
• IRS and government debt

This is separate from your monthly expenses — for example, your ongoing bills like rent, groceries, electricity, water, and utilities.

Average debt balance by age group

Americans are spending thousands of dollars paying interest and research shows it increases as you age. It doesn’t have to be this way with a good budgeting approach and debt payoff strategy. 

Strategies to pay off debt

Debt snowball

Pay off your smallest debt first (while paying minimums on the others). Once the smallest debt is paid off, roll that amount forward to the next smallest debt and repeat.  

Debt avalanche 

Pay off your debt with the highest interest rate first (while paying minimums on the others). Once the debt with the highest interest rate is paid off, roll that amount forward to tackle the next highest interest rate. 

Debt consolidation 

Consolidate high-interest credit card debt into one lower-interest personal loan.  This makes payments more manageable and hopefully, the payoff period is shorter.

Debt management plan or personal bankruptcy

 If you’re facing a mountain of credit card debt and not making much progress, a nonprofit credit counseling agency can set up a debt management plan to cut your interest rate and put you on a repayment plan. Alternatively, explore Chapter 7 or 13 bankruptcy as well. It may make more sense for you in the long run. 

Debt-paying tactics to support your strategy

Update your budget 

According to debt.com about 66% of Americans say they maintain a monthly budget. The superstar budgeting award goes to the 23-38-year-olds — with heavy use of budgeting apps like Mint and programs that automate the process. Many of the apps can help you identify overspending and areas to cut back. As well as help you set goals for savings and paying down debt. As the saying goes, “you get what you measure.”

Keep spending in check and/or reduce expenses

As part of your budgeting process, take a look at your monthly purchases, and try categorizing them into different areas. See where you can cut back to save a little extra each month to increase a debt payment. And, if you’re willing to spend some time calling or chatting with your cable provider or phone company, chances are good that you can leverage your loyalty as a customer to negotiate a lower monthly price. Read 5 steps to negotiate lower monthly bills for a few tips. 

Get a temporary side gig or sell something to get ahead

Cutting back expenses is not the only way to get ahead (and sometimes it’s not realistic), so try earning a little extra on the side. From selling your gift cards to keeping someone company at an event, read our How to make fast cash for 20 legitimate ways to earn a small amount of money quickly.  

You can get debt-free

Having debt is not always bad — and a little can help you build your credit. But large amounts of it are a financial burden. Even if you can meet your minimum payments, interest rates add up — and over the years your personal balance increases — sabotaging your savings and retirement goals. Getting out of debt is a process and starting is the most important decision to make. Make a budget, identify your debts and spending habits, then create a plan. And, remember with each payment, your one step closer to your goal!