Inside this complete guide to paying off debt you’ll learn how to get organized and understand different types of debt and repayment strategies to become debt free!
Understanding Where You Stand With Debt
Hi, friend. Did you wake up this morning feeling that your current financial situation — in particular, your level of debt — isn’t where you want it to be? You aren’t alone! I’ve worked with several individuals who have come to me with concerns about their debt. In fact, on average, U.S. households carry $105,056 worth of consumer debt. This number includes mortgages, auto loans, personal loans, and on average, $6,580 of credit card debt. Another big financial stressor, student loans amount to about $37,853 per borrower. These numbers are icky, I know.
Once you add up the minimum credit card payments, the student loan payments, and any other loans, you may realize that your consumer debt payments take up quite a chunk of your disposable income in your budget. This means that debt can quickly become more than just numbers on paper. Once debt starts spilling over from your budget sheet and significantly impacting your life, it can cause increased financial stress, anxiety, and overwhelm. You become stuck in a cycle of paying a lender instead of using your money to reach your financial and life goals.
To be sure, not all debt is bad. You CAN carry small amounts of debt and still make amazing progress toward your financial goals. However, if you are thinking to yourself, I am not okay with the level of debt I have, then this guide is for you. Together, we are going to walk through the steps to review your debt and create an action plan to pay it off! Whether that is one account (like an auto loan) or your entire debt portfolio, these steps will help you reach your ideal debt-free goal.
⚠️ Note: This guide is focused on paying down consumer debt, not mortgages or student loans. Student loan debt may be in your overall debt total, but there are typically more in-depth strategies involved with paying off student loans that you would seek out after you’ve paid off consumer debt.
🏆 Set yourself up for success: This is a comprehensive guide! Don’t expect yourself to complete all the key steps in one fell swoop. Take the first steps and come back to this guide when you’re ready to move forward on the next one.
Before you start paying off debt
Before we dive into the technical talk about principal balances, interest rates, and due dates, let’s pause to discuss the emotional impact of debt and how you will use that as a driving factor throughout your repayment plan. Where you see debt, you may also see an insurmountable mountain of stress hidden beneath the surface. A “comfortable” level of debt for your friend may not, and most likely will not, be the same for you. The amount of debt you choose to take on is a personal decision! Be sure to ask yourself what level of debt you are comfortable with, and let that be a starting point for your debt payoff journey. If your current level of debt is stressing you out, decide to take that first step to reduce it to a level that helps you sleep better at night.
If you’re feeling overwhelmed by the concept of debt, breathe and remember you don’t have to tackle it alone. Because of their stress around debt, several of my clients have sought help through 1:1 financial counseling. When we create a repayment plan and review the numbers, they often are unable to see the light at the end of the tunnel. To curb this, we surround the repayment plan with a few personal considerations to help them stay intrinsically motivated and engaged with the plan. Prior to recording interest rates and strategizing snowball methods, take time to incorporate these emotional components that will keep you on track to your end goal!
- Find your WHY. If you woke up tomorrow and your debt was 100% paid off, how would you feel? What would you do with the extra money that was once going toward debt? In the answers to those questions, you will soon find out why you want to get out of debt. Maybe, you can now start saving for a home or a child’s education. Maybe you can take that trip you’ve always wanted. Whatever it is, find your why and make it a centralized, visual component of your repayment plan. When the months of payments start to drag on, you can refer back to the reason you started this journey in the first place.
- Understand what works for you. We will dive into the mechanics of making the repayment plan later in this guide, but here, I want you to think about the ways that you will STICK with the plan that is made. If you are a person who hates Excel, then tracking all of your accounts in spreadsheets is most likely setting you up for failure. Likewise, if you are a person who feels overwhelmed by the details of all the accounts and due dates, then you will most likely want to create a plan that consists of a series of smaller steps paired with a simple checklist. (Check out our Shop and Free Resource Library for a variety of different printables to keep you on track!)
- Find a friend. If you are comfortable sharing your payoff journey, find a friend who is willing to hold you accountable as you make progress. You can also work with a financial counselor to have someone walk you through your plan step by step. Reach out to these accountability partners when you need a little extra encouragement to keep moving or to celebrate as you crush your goals.
- Celebrate the wins. Getting out of debt is hard. It can be a long process full of sacrifice and intense determination to reach your goal. Not every moment will be shining, and in those moments, give yourself a little pat on the back as you reflect on where you started and how far you’ve come! This journey is just as important as the destination, so be sure to set specific milestones within your plan to celebrate as they are met. If you have established an accountability partner or financial counselor, let them know when they can expect to celebrate with you at each milestone.
Getting started: How to find your total debt
The first step to tackling a debt payoff plan is to fully understand what debt needs to be addressed. This may feel like ripping off a bandaid, but be sure to circle back to your WHY! Once you are aware of your total debt, you are then able to prioritize, create a plan, and be on your way to reaching your debt payoff goals!
Step 1: Grab a scratch piece of paper (or our free Debt Payoff Planner) and brainstorm a list of all outstanding debt you can think of along with their rough amounts. This doesn’t need to be perfect; you will add in the details later. Think about all possible kinds of debt you may have, such as credit cards, medical bills, student loans, car loans, past collection accounts, and any other non-mortgage debt.
Step 2: Pull your credit report. Visit annualcreditreport.com and follow the green buttons to pull your credit report for free. You will need to answer a few peculiar security questions (for example, which street did you live on when you were 10?) to get a PDF download of your report, or you can request it by mail. Repeat this process to get free reports from all three credit bureaus.
Step 3: Review your credit report and add debt details onto your brainstorm list. As you look through your credit report, check for accuracy and errors. If you see incorrect personal information or issues with your lines of credit, like duplicate accounts, use the online dispute process to get those errors corrected. Finish your brainstorm list by noting any other debt you may have missed, like easy-to-forget buy-now-ay-later loans, or other debt that isn’t recorded on the report.
Side note: Reviewing your credit report is often the best way to spot fraud or identity theft. If you see lines of credit that you did not open, or other fraud indicators, visit identitytheft.gov to get help and resources.
Step 4: Review any other statements and accounts for details of your debt and add them to the brainstorm list. Gather details about interest rates, total balances, and minimum monthly payments.
Once you’ve completed these steps, you should have something that looks like this:
Now, take your piece of paper, or a blank debt template, and finalize any missing details so that you have a final cohesive list of debts. In the next steps, we will divide your debt into categories and assign payoff priorities.
Prioritizing various types of debt
Looking at your completed list of debts may be overwhelming, but let’s break it down and prioritize debts that you want to tackle in the short term.
There are two types of debt: secured and unsecured. Secured debt has an asset tied to it. Think of your car, home, and home equity lines of credit. If you default on those loans, that is going to have a significant impact on your life because the asset can be repossessed by the lender. Unsecured debt has no assets tied to it. Unsecured debt includes items like credit cards, student loans, and medical bills.
Unofficially, there is a third category of debt: the debt you hate. This is the debt that is causing you anxiety, stress, or you just want to get rid of ASAP for a non-financial reason. For example, say you have an outstanding medical bill from breaking your leg last year. That break had a long road to recovery that involved months of physical therapy as well as emotional trauma from the accident. Now that you are finally healed, you just want that chapter of your life to be over, and the medical bill is the final step. If you have a debt that just keeps lurking in the dark corners of your financial life, put a star next to it to make sure it lands high up on our list.
Let’s prioritize
Looking at your list of debts, assign a numerical priority to each debt. Anything that is a long-term loan, such as your mortgage, or requires different repayment strategies, like student loans, can be moved to the end of the list. We want to make a prioritized list that is full of debt we can aggressively tackle in the short term. Begin with secured debt items that must be paid, then list all of the unsecured debts, and sprinkle in your “hate” debt where you see fit.
Methods to pay off debt
Okay, you’ve done the hard work of gathering all of the information regarding your debt! Now that you have a list of priorities to tackle, zoom in a little further and decide how you will tackle the debt you want to pay off. When it comes to tackling debt, you can work on the debt yourself or enlist the help of a third-party. Below, I’ve listed a few of the most popular methods, but be sure to reach out for 1:1 Financial Counseling for guidance on the best method to implement into your budget.
Do-it-yourself methods. The Debt Snowball and Debt Avalanche are two popular methods you can implement by yourself to get started paying down debt right away. Both methods involve listing your debts, then strategically paying off one debt at a time with any extra cashflow you have per month. Once you pay off a debt, you roll that previous debt’s monthly payment into the next debt on the list. Where these methods differ is which debt you attack first.
- The Debt Snowball addresses the debt with the smallest monthly payment first, ending with the debt with the largest monthly payment.
- The Debt Avalanche addresses the debt with the highest interest rate, no matter what the balance is, and ends with the debt with the lowest interest rate.
The Avalanche is best for those wanting to save money on interest in the long run, while the Snowball is best for those who want to see immediate wins in their debt payoff journey. If you’ve got a debt on your priority list that you hate, put that debt at the beginning of either of these plans!
Alternative methods. If you aren’t into monitoring multiple lines of credit, consider alternative methods like a credit card balance transfer or consolidation loan to simplify your monthly payment. The two methods noted below do require more hands-on work on your end to apply for these loans and are also dependent on credit score, but they are equally important to know as options to pay down your debt.
- Consolidation loan or personal loan. A personal loan, commonly referred to as a consolidation loan, allows you to combine multiple credit accounts into one large loan with a lower-interest payment. This is best for those with high credit scores and steady incomes; however, you run the risk of increasing overall indebtedness if you continue to use paid-off credit cards after consolidation.
- Balance transfer card. A balance transfer card is a credit card that has a low or 0% APR introductory offer that allows you to transfer a large credit card balance to this card at the low interest rate. This interest rate is temporary, so it works best if you are able to pay off your debt within the specified promotional period, and it typically requires a good credit score. Note that the interest rate on the new balance transfer card might be higher than the rate you had on your original credit card after the promotional period ends.
Don’t forget: Whichever debt payoff method you choose, it needs to be one that is easy to use and keeps you motivated!
Create a plan
Now that you are organized and familiar with the common payoff methods, let’s tie everything together and create your personal debt payoff strategy!
- Identify minimum payments due. Using your completed debt list, total all monthly minimum payments owed on your debt.
- Find the exact dollar amount to put toward debt per month. With that number in hand, review your budget to see exactly how much you can put toward debt per month above and beyond the minimum payments. The more you can throw at your debt each month, the more you’ll save on interest and the faster you will become debt free! Determine if there are spending categories you can decrease to allocate extra dollars toward your debt goals.
- Pick a method that meets your priorities. Using the prioritized list you created, decide what debt you will tackle, then choose a payoff method that will help you achieve it.
- Keep yourself on track. Utilize visual trackers, goal planners, or an accountability partner to know when you are meeting payoff milestones. Once you meet a milestone along the way, be sure to celebrate to keep your momentum going!
Finding help with your debt
Once you’ve made your debt payoff plan, the most important part is staying focused! It can be all too easy to skip this month’s extra debt payment, or charge a little more on that credit card. To ensure you are staying on track, consider reaching out for help with your debt plan. This could be as simple as utilizing a friend as your accountability buddy, or contacting a professional to help cheer you on.
Those professionals could be:
- Financial counselors. These professionals are skilled at debt payoff strategies and thinking outside the box to help you reach big debt-free goals. Financial counselors can not only help you create your payoff plan, but they also hold you accountable to your goals AND cheer you along the way! You don’t have to go far to find one; just check out our Financial Counseling page to learn more about how our financial counselor can help you pay off debt!
- Non-profit credit counseling agencies. On a national scale, the National Foundation for Credit Counseling connects you with local non-profit (and highly regulated by the state) debt experts to work on a debt management plan. A debt management plan (DMP) helps consumers pay off 100% of their debt in 3–5 years on average. They operate by working directly with lenders and restructuring debt into a single payment that is then strategically paid out to the lenders on your behalf. A DMP might be right for you if you want someone to help you speak to lenders to lower your interest rates or restructure payments to get back on top of your debt. This is less of a DIY approach than the steps listed in this article above, but it might be the right option if you need hands-on debt management support!
- Debt settlement and resolution (NOT RECOMMENDED). – These are for-profit companies that, sadly, can be predatory in nature. Still, I want to educate you on these companies as they are often confused for credit counseling outlined in #2! These companies operate with profits in mind, not consumers, by charging high fees for services. Unlike a debt management plan, these companies hold your debt payments hostage in an escrow account until you’ve accrued enough money to then attempt to settle a debt for less than you owe. This can have tax implications as well as negative credit score impacts. I do NOT recommend working with these companies. Stick with the credit counseling agencies outlined above!
You can do this!
Paying off debt can be very daunting, but with a little organization and know-how, you can get started TODAY on your debt payoff journey! Imagine where you will be in just one year if you take the steps outlined in this guide to tackle your debt. Leave a comment below to let me know your debt payoff gameplan! I’m rooting for you, friend!
