How to Pay Off Debt

What we’ll cover:

  • Go in with a plan. Start by setting a budget and figuring out where you can cut back
  • The snowball method focuses on paying your smallest balances off first, then moving on to larger ones
  • Conversely, the avalanche method starts with paying your highest-interest balances first
  • Other methods of paying off debt: consider a balance transfer card or debt consolidation

Carrying a credit card balance isn’t unusual, in fact: a 2017 report by the Federal Reserve showed that 48 percent of Americans reported carrying a credit card balance at least some of the time during the prior year. But just because it’s relatively common to carry balances doesn’t mean paying them down — let alone tracking each one — is simple. Well, we have some good news for you. It doesn’t have to stay that way.

Here are some strategies that may help you pay down your balances and even make the process more straightforward.

Go in with a plan

Before you start trying to pay down debt, there are a few steps you have to take. The first step is easier said than done; you need to tell yourself, “it is possible to pay down my debt.” Because it is!

Once you’ve figured out how much money you need to pay down, you can draft a monthly budget.

Second, gather all of your information. Pull together your outstanding balances and interest rates on each account so you know where you stand and which account is charging you the most in interest. Now, you can craft your budget.

Set a budget

Once you’ve figured out how much money you need to pay down, you can draft a monthly budget. Figure out how much you spend on daily and monthly expenses and what percentage of your income goes toward those expenses. This way, you’ll be able to see how much money you have left over at the end of the month that you could put toward paying down your debt.

Learn more about crafting a budget 

Cutting back

After assessing your budget, if you find you don’t have a lot left over, consider cutting back where you can to save money. Maybe it’s a staycation instead of a cross-country trip, or bringing your lunch to work and cutting a gym membership. If that’s not enough, consider selling some of your unused or unwanted items to boost your income.

Your credit and debit card statements can reveal a lot about which portion of your income goes to needs and which portion goes to wants. Download your statements and categorize each expense. You shouldn’t feel guilty for indulging every now and then, but to pay off debt aggressively you may have to aggressively cut back.  

Cutting back on expenses and keeping your balances low can positively affect you in more ways than one. Reducing your balances on credit cards and the amount of credit you’re using month-to-month could improve your credit score.  The ratio of the amount of credit you’re using to how much revolving credit you have available from lenders is your “credit utilization ratio”. The lower credit your utilization ratio – the better.   

Now that you have your plan, you can start paying down your debt with a few of the methods listed below. 

Snowball Method

Pay off small balances first.

With the snowball method, you pay off the smallest debts first. Say you have a balance of $50 on one card, $1,500 on another and $4,500 on a third; in this case, you’d start by paying off the $50 balance while making the minimum payments (or more) on the other cards. After you’ve paid off the $50 balance, move on to pay off the $1,500 debt, and so on.

This method is less about math and more about behavior modification. The idea is that by seeing results early on, you’ll be more motivated to continue paying down debt.

A potential downside to this method is that if your highest balances are on your highest-interest cards you may not be making a big dent in reducing your total debt. If this is the case, you may want to consider this next method.  

Avalanche Method

Pay off higher-interest accounts first

The key here will be to pay down the cards or accounts that have the highest interest rate first. Then, once those accounts are paid off, move to the accounts with the next highest interest and continue until all the debt is paid off. Along the way, be sure to make the minimum payments on all your other cards.

The benefit to this approach is that it more effectively minimizes the amount you pay in interest. The lower the interest rate is on a debt, the more you are paying towards the principal balance instead of the fee you’re paying to borrow the money.  

Use a balance transfer card

A balance transfer allows you to transfer your credit card debt from one or more cards to a new credit card, sometimes for a fee. If you have debt on a credit card with a high interest rate, you could consider a balance transfer. Balance transfers may be advantageous because they could allow you to pay a low promotional interest rate for a limited amount of time.

The only catch is that if you fail to pay back your balance before the promotional period ends, the interest rate could go up by quite a bit. So, if you do decide to go this route, be sure to stay on top of your payments and mark on your calendar when the promotional period ends. If you don’t think you can pay back all your debt before the promotional period ends, it may not be worth it to use this method.

Learn more about balance transfers 

Don’t be afraid to call your lenders to negotiate a lower balance or interest rate.  You may be surprised with what they can offer you! 

Consider debt consolidation

If you find juggling numerous accounts a pain to keep track of, taking out a personal loan for debt consolidation could be a good option.

A debt consolidation loan is used to combine multiple debts into a single, larger debt. It could have more favorable terms, and instead of having numerous payments for those debts, you would have just one recurring monthly payment.

Learn more about debt consolidation 

Stick to your goal

Paying off debt fast can be hard, but just deciding you want to be rid of it is a step closer to your goal. When it comes down to it, the key to becoming debt-free is just keeping your eye on the objective.

Once you’ve hit your goal, you’ll know you’ve accomplished something great.

Some benefits of debt-free living

Learn how you can simplify your debt with a debt consolidation loan

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.