How to Pay Off Debt: Where to Start

Trying to get out of debt is challenging and can be downright all-consuming. While it can be difficult and stressful, paying off debt can become more manageable by implementing and following the right strategies to help you achieve your goals.

In this guide, we will help you figure out exactly how much debt you owe and share the best strategies on how to pay off debt faster and more easily.

What is debt?

The term “debt” refers to money that you owe. It covers all types of agreements such as student loan debt, car loans, credit card bills, medical bills, home equity, payday and personal loans, and IRS or government debt.

The total amount of non-housing consumer debt in the U.S. in 2022 was over $4.5 trillion. That means a lot of us are likely in some sort of debt.

Many Americans look toward credit counselors and debt relief programs to learn how to manage and pay down what they owe. However, there are ways you can control mounting debt yourself. First, you will want to figure out just how much debt you owe.

How to tally up your debt

If you have only one credit card or personal loan payment, it’s easy to see how much you owe at a glance. However, if you’re like most people, you likely have multiple lines of credit and various types of debt.

Here’s how to track down and total it up so you can decide how to pay off debt based on your financial situation:

1. Total up your debt

First, check each account and write down the total amount of your current debts. You may have to dig into some bank accounts or statements to find your current loan amounts. But having every item in front of you at once can help you determine which is highest, how to consolidate multiple debts, and prioritize the most urgent ones. You may also want to note the type of debt it is: personal loan, credit card, auto loan, etc.

A free service like Credit Sesame can help you tally your debts quickly. You’ll get insight into your credit score and history, how much you owe, who you owe, the interest rates you’re being charged, and whether or not any of your debts are in collections.

2. Calculate your debt-to-income ratio (DTI)

Next, calculate your debt-to-income ratio (DTI). Your DTI compares how much money you owe to how much you earn. Lenders often use this figure to decide whether you qualify for loans or services.

In general, a DTI ratio of 35% or less is manageable. Between 36% and 49% means there’s room for improvement, and 50% or more requires immediate action to resolve.

How to calculate your DTI ratio:

1. First, add up all your monthly bills. Include debt payments like credit card balances, student or auto loans, plus rent, alimony or child support, medical debt, and other debt. You can, but don’t have to, include household expenses like utilities and groceries.
2. Then, divide the total monthly debt by your gross monthly income. Gross monthly income is the amount of your paycheck before taxes come out.
3. The resulting number is your DTI percentage.

3. Check for debt in collections

If you are unsure about how much debt you have, check to see if you have any outstanding accounts in collection. One way to track this down is to check your credit report. 

Many financial institutions and apps offer a free credit score, but your bank or credit card company may also provide similar services. You are also entitled to a yearly free credit report from each credit reporting bureau.

Strategies to pay off debt

In addition to making the minimum payment on all debts, try one of these repayment plan options to make a dent in the balance faster. While each strategy has its own benefits and drawbacks, you’ll need to develop money management skills to make any one of these strategies stick.

1. Debt snowball method

Developed by personal finance expert Dave Ramsey, the debt snowball method uses small steps to pay off debt. It's more of a psychological approach than a mathematical one.

The idea is to pay off your lowest balance first. Make your minimum monthly payments on all your debt, and apply any additional funds toward the debt with the lowest balance. That way, you will feel accomplished when you pay off one entire line of credit. This psychological boost from quick wins can help keep the momentum going as you pay off the next item in line.

The snowball method gets its name from the fact that once you pay off the smallest debt, you roll the payment you were making on that debt onto the next smallest balance along with the minimum payment you've been making. In this method, each smaller payment continues to add up until you reach the highest balance and begin chipping away at it.

While this method may not work for everyone – especially those who recognize the psychological ploy for what it is – many finance experts swear by it.

2. Debt avalanche method

Like the debt snowball, the debt avalanche method advises paying the minimum payment on every account balance simultaneously. Then, if you have any extra money, you can apply that amount to the highest-interest debt. When that debt's paid off, you apply the payment you've been making to the debt with the second-highest interest rate, and so on. 

Snowball vs. avalanche: which is better?

Debt snowball	Debt avalanche
Start with the lowest balance first	Start with the highest-interest-rate debt first
Starts with small wins	May take longer to pay off initial balances
May pay more in interest	May pay less in interest
Best if you need motivation to keep paying off debt	Best if you want to minimize interest

Choosing between the debt snowball method and the avalanche method depends on your circumstances. 

The primary difference between the two is interest rate versus overall balance. The snowball method concentrates on paying the smallest balance first, regardless of the interest rate, while the avalanche method focuses on reducing debts with higher interest rates.

In theory, the latter approach means fewer fees due to interest than the snowball method. And although the avalanche method saves more money in interest overall, there’s still more to it than that.

Social science explains that although the avalanche method may prove more efficient in paying off debt with fewer fees, human nature disagrees with the process (hence the psychological effect). One study showed that people with high debt are more likely to stick to a plan that focuses on paying off lower balances first.

Other experiments showed that people who paid down debt one account at a time helped maintain their motivation long-term. Plus, the overall focus was on what portion of a balance they had success paying off rather than what was remaining.

Still, your circumstances may influence your game plan when it comes to which loans to pay off first with snowball versus avalanche debt reduction methods.

When choosing a debt repayment strategy, it’s helpful to do the following:

• Calculate the measurable difference first, using your own figures from existing debt. This will show you the time it takes to pay off loans plus the amount of money you stand to save by either method.
• Look at the numbers, not just the difference between the two. Also, consider the timeframe for your debt payoff and whether a shorter payoff period is worth the difference in payments.
• Check your motivation level, whether monthly or less frequently. The best debt reduction plan is one you can work with long-term.
• Focus on one account at a time, regardless of whether it’s a high-interest or high-balance account. Making progress is the best indicator that a plan is working for you.
• Keep working at it and acknowledge even the smallest of successes.

3. Balance transfer credit cards

Balance transfer credit cards are a common strategy for debt reduction, especially if you are dealing with high interest rates or overall credit card debt. A balance transfer credit card is one with a low or 0% introductory APR. Transferring a balance to a credit card with a lower interest rate can save consumers money on debt repayment.

After the introductory period, however, some balance transfer cards may revert to high APRs. Therefore, this method may not be for you if you have a high amount of debt without the means to pay it off within the introductory period. It also may not be a good fit if you don't have the good credit needed to qualify for some of the best cards. 

If you have multiple accounts with low balances but high interest rates, consolidating them into one of the best balance transfer cards may save you money overall. You do need to be able to qualify for a new credit card, however. You will also have to pay a balance transfer fee. 

4. Debt consolidation

Debt consolidation loans function much like balance transfer credit cards, allowing you to combine all of your loans into one, so only a single monthly payment is required. Essentially, you would take out one loan to cover all (or a selection) of your debts. A debt consolidation loan could be a personal loan, but you could also take out a home equity loan and use it to consolidate your debt. 

This approach can help some borrowers save money on debt repayment, but looking at the loan terms carefully is important. While some debt consolidation programs incur higher fees than if you continue to pay minimum payments on multiple debts, the best debt consolidation companies help you pay off debt while incurring nominal fees.

In the long run, debt consolidation can save money, depending on how high your interest rates are and what your loan terms are.

5. Credit counseling and debt management

Many finance experts offer services and courses to help you manage your debt. According to the Federal Trade Commission, however, reputable credit counselors are nonprofits and offer services across local and online locations.

Finding a credit counselor can start with a quick internet search for a credit counseling agency in your area. An organization that offers multiple services, such as budget counseling, debt management and savings classes, and in-person consultations, is ideal.

However, visiting a credit counseling organization may incur additional fees beyond your debt payments, even if the agency is a nonprofit. If you enroll in a debt management plan, the organization could negotiate and pay off debts on your behalf, but they may charge for this service. 

Also, if your credit counselor recommends a debt management plan, ask plenty of questions before agreeing to the terms. And be sure to seek out an accredited counseling agency. 

To start, check out our list of the best credit counseling companies.

6. Debt settlement

Companies that offer debt settlement work on your behalf to negotiate with creditors to secure a reduction in your overall debt.

Then, you make a payment to the debt settlement company to absolve your debt. While this strategy works for consumers who are possibly facing bankruptcy or more severe credit problems, debt settlement can affect your overall credit score.

Although debt settlement negatively impacts your credit, especially if you make late payments on the settlement amount, this is a helpful option for people whose debts are so severe that they are considering bankruptcy. Also, making payments on time and eventually paying off the settlement amount will help your credit begin to recover.

Debt consolidation vs. debt settlement: which is better?

Like before, choosing between debt settlement vs. debt consolidation to pay off your debts depends on your personal circumstances.

If you are hoping to increase your credit score, choosing to consolidate your debt may prove to be the smarter choice. Settling can negatively impact your credit; debt consolidation is often easier on your credit report. Also, debt settlement companies operate independently, so you may incur fees when working with them rather than choosing a consolidation loan.

In general, though, debt settlement can significantly reduce the total amount that you owe, meaning you could pay the balance off sooner and improve your credit faster. However, it will negatively impact your credit score, and it could take a long time to recover. 

Which debt advice should you follow?

If you have multiple accounts and outstanding debts, it can be difficult to choose debt advice to follow. Overall, your choice will depend on the following:

• How much you owe
• How many accounts and what interest rates you have
• How high each balance is
• Your financial goals

For example, if you have multiple low balances, but each has high interest rates, your best option may be debt consolidation or a balance transfer credit card. Both options mean fewer interest payments over the long term, and you can pay down low balances faster.

No matter which advice you choose to follow, it’s important to have a debt repayment plan (and stick with it).

Know how much you can afford to spend toward paying down debt each month. Use online calculators to project your long-term spending and savings. Avoid adding to your debt when possible. Consider using small windfalls like tax refunds to pay down your debt further and starting an emergency fund to help prevent you from going into more debt in the future. 

Recognize that paying down debt may take years unless you have extra income to put toward the payments. Overall, setting small, short-term goals and making sure to track your progress can keep you motivated and ensure that you keep working toward paying down balances. 

9 ways to pay off debt fast

Wondering how to pay off debt faster than your current timeframe? Here are nine strategies that can help you reach financial freedom sooner.

1. Create a budget

To stop increasing debt, you must first limit your spending habits. Make a budget that takes into account your monthly income, monthly expenses, and debt repayment amounts. Then work on sticking with it.

2. Pay more than the minimum

Paying extra on any one account will help you pay it down faster and avoid more interest. Even a few extra dollars per month can make an impact, so when you have extra cash, plan to put it toward your debt. If you want to create more extra cash, consider starting one of the best side hustles or getting a second job, even if it's just part-time.

3. Reduce spending

Cut your spending as much as possible. This ties in with budgeting, as reducing your spending is a comprehensive part of any budget. Cut out unnecessary expenses and put that cash toward debt repayment.

4. Pay more

If you have extra income at the end of each month, put extra payments toward your debt rather than entertainment or other purposes. It’s no fun to skip eating out, but if you put that amount toward a credit card payment, you will soon see the benefits and improve your credit. The same applies to work bonuses or cash gifts. 

5. Unsubscribe

As painful as it might be, it’s time to cut ties with those newsletters and alerts that notify you about sales and promotions. Without the temptation in your inbox or mailbox every day, you are less likely to spend on things you don’t need.

6. Hold a sale 

If you have unwanted items in your home, consider selling some of the high-ticket items and putting the money toward debt repayment.

7. Reassess the basics

There are often ways to downsize that don’t require huge sacrifices, such as swapping cable TV services for a monthly subscription to Netflix or Hulu, which can cut costs substantially, and eating at home to save cash versus eating out for most meals. You will be surprised at how quickly it adds up after only a short period of time.

8. Find new rewards

Instead of rewarding yourself by buying new things when you reach a goal, consider gifting yourself in other ways. Enjoy your favorite show, cook your favorite meal, or give yourself permission to relax and read a book without any other responsibilities to tend to.

9. Tell friends and family

It may feel embarrassing to admit that you are working on paying down debt, but enlisting the support of friends and family can help you make progress. People around you can keep you from overspending unnecessarily, and knowing that you are trying to save money prevents them from encouraging your bad cash habits.

Bottom line

The key strategy for how to pay off high-interest debt, no matter how much you have, is to stay motivated. Plan a reward for yourself when the debt drops to zero and maintain a can-do mentality. Before you know it, you’ll have made more progress than you ever thought possible. You will be well on your way to being debt-free.