Paying Off Debt

Personal debt threatens the financial security of millions of Americans. Costs of a home, car and college can trigger a cycle of debt that seems impossible to break. Committing to a set of responsible saving and controlled spending habits will help you reduce your balance, rather than continually add to it. Take control of your debt by creating a workable budget, developing a credit elimination strategy and thinking like a saver.

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Alanna Ritchie, Writer
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    Alanna Ritchie

    Alanna Ritchie

    Staff Writer

    Alanna Ritchie is a content writer for where her primary focus is on personal wealth management.

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    Emily Miller
    Emily Miller, Managing Editor for

    Emily Miller

    Managing Editor

    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the team in 2016.

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  • Financially Reviewed By
    Michael J. Boyle, M.S.
    Michael J. Boyle

    Michael J. Boyle, M.S.

    Former Compliance Professional

    Michael J. Boyle began his career in the securities business in 2011 as a registered financial professional. Over his tenure, he’s worked with asset classes including equities, fixed income, CDs, mutual funds, futures, options and foreign currency.

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  • Updated: October 20, 2023
  • 8 min read time
  • This page features 5 Cited Research Articles

Debt in the U.S.

Americans swim in debt. Most of us use credit and owe money for something. Unfortunately, we owe too much.

The average U.S. household owes $7,281 on credit cards. Add in a mortgage, car payments and student loans and it’s easy to see how you, like so many others, can get stuck in I-owe-you mode. In total, American consumers owe $11.83 trillion in debt, according to the Federal Reserve Bank of New York.

Consumer Debt Totals

Based on the Q2 2022 Household Debt and Credit Report, consumers owe:

  • Mortgage balances totaling $11.39 trillion
  • Newly originated auto loans of $199 billion
  • Cumulative student loan balances of $1.59 trillion
Bar graph on total debt balance and its composition

Realistically Evaluate Finances

The first step to getting out of debt is to understand how much you owe and how much you can afford to pay off each month.

Calculate Your Debt

Put all your debts on paper and include them in your budget. Go through your mail and gather bills. Keep only the most recent and updated bills and throw away duplicates and older bills. Figure out the exact total of what you owe each month – and then write out the various interest rates and balances you’re paying on your credit cards. Make a list of phone numbers, and addresses of creditors. A word of caution: this isn’t easy. In fact, it’s grueling.

DO make a plan.

What are your priorities? What will you do once your debts are paid off? Staying motivated will be difficult if you don’t have direction.

Tackle Your Bills

Now you have to do the hard part. You need to call your creditors. Your goal is to negotiate better interest rates moving forward and monthly minimum payments you can afford right now.

If you’re unsure whether your debt sits at a manageable level, financial experts recommend keeping monthly debt payments at or below 15 to 20 percent of your income. These payments encompass credit cards, loans, car payments and any other installment debts. Experts maintain you should spend no more than 30 percent of your income on housing.

DON’T overpay.

Paying too much for a mortgage or rent can force you to rely on credit cards for everyday expenses, leading to more debt.

Happy woman, fanning 100 dollar bills

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Breaking the Debt Cycle

There’s one more thing to assess before you start attacking your debt. You have to resolve to change the behavior that got you here. There are all kinds of ways to get under water financially. The debt cycle looks different for each person.

For some, debt is a small amount of money that grows slowly over time and then becomes difficult to handle as interest rates and fees slowly start a downward spiral. For others, unemployment and under-employment set the stage for too many bills.
Poor health, which leads to numerous tests, scans and doctor bills, can be a cause of debt. (Medical debt is the No. 1 reason Americans file for personal bankruptcy.)

Still others carry student loans into low-paying jobs and have trouble balancing expenses.

Once you look at your financial situation and decide it’s time to address it, you’ve taken your first step.

Where did you overspend, and which monthly payments did you continually overlook or consciously leave on the back burner?

You may be able to identify places where you continually miss payments, pay late and suffer from increasing interest rates:

  • Have you relied too heavily on credit?
  • Is part of your debt related to poor budgeting skills?
  • Does your budget reflect where you actually spend your money?

Make a Working Budget

Your next mission is to identify clear priorities and commit to a plan.

Establishing a successful budget requires you to make a long-term strategy for managing money. It’s not simply setting some limits and hoping one day you’ll have enough for the car of your dreams. It’s not a loose guideline based on how you think you probably spend your money.

Use a notebook, spreadsheet, financial software on your computer or even a mobile application. Find a form of accountability that works best for you. Whichever method you choose, make sure to include fixed expenses (regular bills that are the same amount every time) and variable expenses (those that fluctuate as needs change).

Compare these totals with your monthly income. Determine how drastically your spending habits need to change. Make a practical budget based on the habits you already have, how you actually spend your money, while incorporating small changes for meeting goals.

Quick Budgeting Tips:

  • Budgeting is not a task to be completed in one sitting and never looked at again. From time to time it will be necessary to tweak your strategy. When your income changes, when your goals change, update the budget.
  • Budget for the month, not paycheck to paycheck. This gives you a fresh start with each month and leaves some room for peaks and valleys.
  • Make a plan accounting for short-term and long-term needs. This allows you to celebrate your progress and remain focused on the big pay-off down the road.
Multiethnic couple handshake with consultant at home

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Establish New Habits

As part of your climb out of debt, you’ll have to change your attitude about spending. Even if your debt didn’t come from overspending, you still will have less discretionary income. And you must stop adding to your debt.

Cut up your credit cards. Avoid shopping trips that are sure to be full of temptation. Learn to distinguish between items that you need and want. Then, commit to your plan and begin chipping away at the amount you owe.

6 Steps to Financial Freedom:

  • Making monthly payments in full and on time
    The easiest way to add to your debt is to miss payments or make payments late, leading to penalties and higher interest rates.
  • Take advantages of automated options
    Some creditors offer discount interest rates if you agree to automatic payment deductions from your bank account. This saves you money and helps you avoid missing payments.
  • Pay attention to interest rates
    The average credit card holder pays an annual percentage rate of 17 percent. Financial experts recommend trying to reduce the debt you owe by beginning with the accounts with the highest interest rates.
  • Reducing principal
    You can expedite the debt reduction process by paying more than the monthly minimum payments. Paying only the minimum balance can extend the length of time you are in debt and increase the amount of interest you pay over all.
  • Look at balance transfers
    It can be a risky move, but transferring balance from high interest accounts to low interest ones can be a way to save on interest. However, beware missing these new payments or signing up for low introductory rates that may eventually skyrocket.
  • Put that tax refund to good use
    Gain some major ground in repaying debt by using your tax refund to reduce principal.

Become a Saver

Putting the brakes on borrowing and spending habits demands you starting thinking like a saver. You want to move from a place of getting by to a place where a crisis doesn’t destroy your financial security.

Create an emergency fund that can act as a buffer for unexpected expenses. Start with a few hundred dollars and eventually work up to at least $1,000. This keeps you from borrowing and returning to the sources that got you into debt in the first place.

To keep this in place long-term, focus on the emergency fund before making minimum payments. Then, after spending money on emergencies, replace the cash as quickly as possible.

Benefits of Saving:

  • Foster a large nest egg
  • Emergency fund
  • Afford a car
  • Down payment on a home
  • Healthy retirement
  • Pay off emergency debt

Find More Income

Even with a good plan and disciplined approach, you may still struggle to make significant headway reducing debts. The monthly burden of living expenses often leaves very little wiggle room, preventing you from gathering extra funds. These circumstances demand you expand your strategy by increasing your income.

Use your time and talents to find other places to bulk up income. Try to nab a second job—even if it’s a few part-time hours or a seasonal gig. Your flexibility can make you valuable to employers needing workers but without the resources to hire full-time. Consider retail or restaurant jobs or entry-level positions with fewer restrictions in terms of years of experience. You might discover something new you are passionate about. Or you might find how passionately you want to repay your loans so you don’t have to continue in customer service.

Income Questions to Consider:

  • When was your last raise?
  • Do you have a solid case for an earnings increase?
  • Have you recently added responsibilities?
  • Is there availability to put in additional hours?
  • Does your employer pay time-and-a-half pay for over-time hours?
  • Are you taking advantages of all current opportunities?

Let’s Talk About Your Financial Goals.

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Time & Money

If time restricts you from working too many extra hours, don’t accept defeat. Your current job and previous education may provide you with a strong foundation for all kinds of freelance jobs. Depending on your skill level, your hourly pay for this type of work can be increased, freeing you up to relax during the rest of your time off.

Look for other income sources to add to the funds you earn from working. There may be items you own and things you can make to sell online and get a quick buck. Downsizing the money you spend on rent or a vehicle could also free up funds. If you own an annuity, consider selling your annuity payments. Thinking outside the box can help you gather enough money to exponentially speed up your debt elimination process.

Make sure this effort is worthwhile by committing to using the extra income only for debt. There are a few valid reasons to sell annuity or structured settlement payments, but the loss of that regular income will require you to adapt your budget and financial strategy. If you don’t use the lump sum from your sale responsibly, you will end up right back where you started.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 20, 2023