Debt Consolidation

Creating a Plan to Become Debt-Free

Debt in America is on the rise. According to new data from the Federal Reserve Bank of New York, household debt has increased every quarter for the past four years and now totals nearly $13.3 trillion.

But many Americans aren’t equipped to handle debt. The Charles Schwab Modern Wealth Index found that less than a third of Americans have at least three months’ worth of emergency savings to cover living expenses, and just 37% say they have zero credit card debt and pay their monthly bills on time.

Having lots of debt and very little savings puts your current financial stability and long-term financial well-being at risk. Paying down debt can help put you on more solid ground. Here’s how to tackle what you owe so that you can become debt-free.

Your 5-step plan to pay off debt

1. List out your debt

The first thing you must do before you can pay off your debt is understand your financial situation. Collect and review your bills, bank account balances and credit card statements. Write down the current balance, annual percentage rate (APR) and minimum payment for each outstanding debt, and note any existing payment schedule and prepayment penalties associated with those accounts.

You can use any method that will help you stay organized, whether that’s a spreadsheet in Microsoft Excel, Google Sheets that you can sort and color code, or a handwritten list in a notebook. The key is to pick a format that will be easy to access and update over the months (and possibly years) you spend working on your debt.

2. Consider your disposable income

Next, determine how much disposable income you have to put toward your debt. Disposable income is the money you have left over after you cover necessary living expenses, such as food, shelter, transportation, and healthcare. It also takes into account factors such as the number of dependents you have and your debt obligations.

The U.S. government has a form that could help you calculate your disposable income down to the dollar.

Knowing how much free income you have after bills is important because you’ll use your disposable income to help you pay off your debt. If you have little or no disposable income, you may want to work overtime, pick up a second job or find a temporary gig.

While additional employment won’t work for everyone, having a side hustle can give you a financial cushion to cover your essential expenses and work on your debt. Drive for a car-sharing service, sign up to charge electric scooters, take paid online quizzes or pick up shifts at a cafe on weekends.

Another option to create more cash is to cut back on spending.

    • Audit your subscriptions and determine if you really want to pay for those magazines, music services and media accounts such as Netflix. If you do, look into splitting the cost with friends or find free alternatives. If you don’t, cancel them.
    • Instead of grocery shopping when you’re hungry, plan your meals ahead. This way, you’ll buy ingredients you can use multiple times so that nothing goes to waste. Use leftovers for lunch instead of dining out.
    • Make use of loyalty cards and coupons. Sign up for rewards programs at stores you visit frequently and check out coupon apps such as SavingStar.
    • Sell what you don’t need. List items on Craigslist or apps such as Letgo or have an old-school garage sale.

Autumn Campbell, a certified financial planner at The Planning Center in Tulsa, Okla., said cash flow is a key factor in tackling debt.

“We can make a perfect hypothetical or conceptual plan, but if we don’t have the cash to implement it, we’ve done it for naught,” she said. “It’s important to know what is necessary to make the minimum payments as it currently stands.”

Campbell said to look at what options you have to make those necessary payments.

3. Decide on which debt you’ll prioritize

Which debt you’ll pay off first will depend on your specific financial situation, the mix of outstanding bills you need to pay and the flexibility you have to negotiate your debt down or work with your creditors on an alternate payment plan. We’ll cover different debt repayment methods later, but before you part with your money, research options that your creditors offer to reduce or delay payments.

“We have to figure out what are we working with, what are the different options that we have regarding cash flow and interest rates, what levers do we have to pull if needed or can we pull now, and then we put those dollars to the best use,” Campbell said.

For example, if you have medical debt that still sits with the original biller — a hospital or provider — you may be eligible to get your medical bill reduced or waived entirely. Meanwhile, credit card companies may be willing to lower your rate. If you owe back taxes, the IRS may be satisfied once you commit to a payment plan so that you don’t have to tackle the full amount now, Campbell said.

Most creditors just want to know they’ll get their money, she added.

4. Choose a debt repayment strategy

You have various options for paying back your debt. Consider the following repayment strategies and choose the one that works best for your financial situation.

Debt Snowball

The debt snowball method commits you to tackle your smallest debt first by putting as much as you can afford toward that bill while still paying the minimum balance on your other accounts. Once you’ve paid off the smallest debt, you move on to the next smallest balance, and then the next, until you reach your last — and largest — debt.

Debt snowball likely won’t get you out of debt the fastest, but it does give you quick wins and an emotional boost as you cross outstanding accounts off your list. If you are just starting out on your debt repayment journey, this method helps keep you motivated to continue.

What is the downside of the debt snowball method? It can cost you more over time if your larger balances have high interest rates.

Debt Avalanche

The debt avalanche method prioritizes the debt with the highest interest rates, no matter the balance. The advantage of debt avalanche over debt snowball is that it likely saves you money and helps you get out of debt more quickly.

This strategy works well if you have extra cash from your side hustle or better budgeting practices because you have more money to commit to debt repayment without jeopardizing your living expenses. But it could take months or years to pay off your single largest debt, which means you won’t have any big wins for a while. It may feel as though you’re not making progress — this can be discouraging and make sticking to your repayment plan difficult.

Debt experts say that if you do go with this method, it’s important to keep your end goal (and your debt-free date) top of mind.

Debt consolidation loan

A debt consolidation loan isn’t a repayment strategy, exactly. But it does allow you to combine multiple debts into one so that you can make a single payment each month rather than many. This is helpful if you have several kinds of debt spread across multiple creditors. There are a few different types of debt consolidation loans, and you may be eligible for all of them depending on your credit score and existing assets.

For example, a personal loan is a common consolidation option for credit card debt. The downside of a personal loan is that rates may be higher because it’s unsecured, and you’ll only get the best rates if you have decent credit.

If you own a home, you can apply for a home equity loan, which provides you with a lump sum to put toward other debt, or a home equity line of credit (HELOC), with which you borrow only what you need. You can also do a cash-out refinance on your mortgage. In all three cases, your property secures the loan.

If you’re not careful, a debt consolidation loan could increase your debt because you’re simply borrowing more money. Always aim for a lower interest rate when consolidating existing debt with a new loan or line of credit.

Student debt refinancing

If student loan payments are part of your debt package, you may be able to refinance to a lower interest rate than what you qualified for on your initial loan. Both federal and private student loans are eligible for refinancing, which means you can streamline your payments at a single interest rate.

But student loan refinancing can get tricky. If you have federal student loans, you may lose federal benefits, such as debt forgiveness and access to income-driven repayment (IDR) plans, by refinancing into a private loan. In these cases, you may want to consider federal loan consolidation. Your interest rate won’t go down, but you may qualify for a new IDR plan and get to make one monthly payment instead of many on your student loans.

If you do refinance with a private loan, make sure you understand whether you’re signing up for fixed or variable interest rates. A variable rate means your monthly payments will fluctuate over time, making it harder to budget over time.

“Make sure you speak with someone who is knowledgeable before refinancing,” said Jonathan McAlister, a certified financial planner at Legacy Wealth Management in Memphis, Tenn.  “If you refinance public student loans to a private loan, you could be giving up lots of payment options and even the opportunity to have the student loan debt forgiven.”

Balance transfer

A balance transfer onto a low-interest or 0% APR credit card is a form of debt consolidation. It transfers most or all of your outstanding credit card balances onto a single card with a lower rate. When considering a balance transfer, look for cards that have a promotional 0% APR for 12 to 21 months.

To qualify for these promotional rates, you must have good to excellent credit. If you’ve been in debt long enough that your credit score has plummeted, or if your overall credit usage is high, you may not have a balance transfer option.

If you are eligible for a 0% APR card, make sure you can pay off your balance before the promotional period ends. Otherwise, the interest rate will revert to normal, which is often higher on balance transfer cards than other credit products. If you have a lot of credit card debt, you may not be able to consolidate it all onto a single card.

Some cards also come with balance transfer fees between 3% and 5%, and others charge deferred interest. That means that if there’s any balance left on the card after the promotional period ends, you’ll owe interest on the entire opening balance. Read the fine print before you commit.

Debt management plan

In a debt management program, you’ll work with a nonprofit credit counseling organization to streamline your debt payments. Credit counselors have ongoing relationships with major lenders, and they can negotiate better terms and lower interest rates on your behalf. They’ll then collect a single monthly payment and distribute it among your creditors. Your debt stays with the original lenders, but your payments are simpler — and you’ll likely owe less, in the long run, thanks to negotiated interest rates and fees.

Debt management can be helpful if you need guidance to start on or stick with a repayment plan, but it isn’t right for everyone. For example, if your debt is secured — mortgages and auto loans — it won’t qualify for debt management. And if you don’t have sufficient income to make your monthly payments, a debt management plan probably won’t help you. These programs also have enrollment and monthly fees.


Bankruptcy may be the best option for some debtors. It can help you eliminate what you owe, create a workable repayment strategy or change the terms of your debt. Bankruptcy is a serious step, however, and you should consult a credit counselor or bankruptcy attorney to determine if it’s right for you.

There are two common types of bankruptcy for individuals. In Chapter 7 bankruptcy, most of your debt is discharged, meaning you get complete debt relief and can start fresh in about four months. Chapter 7 does stay on your credit report for 10 years, so it could have a lasting impact on your ability to qualify for future financing. To be eligible, you may have to complete a means test that shows your financial need.

Under Chapter 13 bankruptcy, you’ll create a three- or five-year repayment plan and make monthly payments on your debt. After that period ends, the court discharges any outstanding balances. This form of bankruptcy allows you to save your assets, such as a home in foreclosure. Higher earners may only be eligible for Chapter 13 bankruptcy.

If you own a business or have significant debt, you may have to file Chapter 11 bankruptcy.

5. Prevent debt from piling up again

The last thing you want once you’ve paid off your debt is to land back in the same situation, which is why it’s important to set yourself up for future success starting now.

What to do as you repay each debt

Paying off debt has an important behavioral component, according to Campbell. Money can be emotional, so it’s important to allow for wins and losses along the way and to not beat ourselves up over what we “should” or “shouldn’t” do.

“The easy part about this is identifying how much do we owe, and how much do we need to pay, and when it’s paid off,” she said. “I think most people can do that pretty well. The ‘shoulds’ are really the Achilles’ heel of people paying off debt or a large goal they’re trying to meet.”

Here are a few strategies to help you stay on track

Celebrate wins both big and small

Depending on how much you owe, you may be working on debt repayment for years. To stay motivated, get excited about a few extra dollars of income, a streak of on-time payments and finally crossing one of your debts off your list.

Focus on the goal, but be flexible

Campbell noted that going “cold turkey” on spending may be the fastest way to tackle your debt, but it’s the least fun. It’s OK to spend on small pleasures that are highly impactful to your happiness if you stay focused on what you’re working toward.

“It’s important that we keep our end goal in mind,” she said. “It’s a lot easier to say no to things if we have a bigger yes, a more important yes.”

Confirm with lenders that your debt is closed

Don’t assume that a balance of zero on a statement means your debt is gone. Ensure there are no outstanding fees or remaining obligations before you write off an account.

Build an emergency fund

Paying off debt is great, but if you don’t have any savings to cover unexpected events, such as a broken water heater, car repairs or a hospital visit, you’ll end up putting those expenses right back on your credit accounts. Campbell recommends saving slowly but consistently so that you have the cash to cover the “hiccups.”

Avoid taking on more debt

Try not to add to your existing debt. Only spend what you can afford, don’t open new lines of credit and stop making big purchases on cards that you’re working to pay off.

While debt can feel overwhelming — even scary — it’s possible to move through it with persistence and a plan. Find a friend to hold you accountable, ask for professional help when you need it and keep in mind that becoming debt-free is a long-term commitment with ups and downs.

“We have to just keep on keeping on, and it will get better if we hold ourselves accountable and give ourselves grace,” Campbell said.


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