Debt payoff plans explained

Debt can feel like a heavy burden, especially when you’re dealing with multiple loans and credit cards. With the debt of the average American amounting to a hefty $104,215,¹ many feel like they will never be completely debt-free. Having a plan in place is one way to pay it off. In this guide, we’ll look at some methods to help you tackle debt and take control of your finances.

A debt payoff plan is a strategy for organizing all the debt you owe and following a plan of action to manage your monthly repayments. Let’s say you’re juggling a credit card balance, an auto loan, and some lingering student debt. Instead of trying to tackle all of them at once and feeling like you’re in over your head, a debt payoff plan can divide it into smaller, feasible steps that may better fit your lifestyle.

The goal is to help you make more consistent and efficient progress to becoming debt-free by focusing on the specific conditions of the debt. A good repayment plan also takes your income and monthly budget into account, so you end up with a realistic strategy that truly works for you.

When it comes to paying down debt, there’s no one correct approach, and what works for one person might not work for another. The important thing is finding a strategy that fits your particular situation, and we’ve outlined five steps that can help you get started.

Debt can pile up from all sorts of places — credit cards, store cards, personal loans, student loans, and more. It can be easy to lose track of what you owe. That’s why, before selecting a debt payoff plan, you could start by jotting down each of your debts in order of interest rate, as well as the outstanding balances. Seeing everything laid out in one place can help when it comes to choosing a suitable repayment strategy.

An easy way to do this is by checking your credit report. You can get a free copy from places like Equifax or Experian. This report will list all your active accounts, like credit cards, loans, and mortgages. You can then reach out to each creditor to double-check the amounts you owe. Once you have this information, you’ll be ready to choose a method to pay down your debt.

Two of the most popular techniques for dealing with multiple debts are the debt snowball and debt avalanche methods.

When you look at your debts, you might notice you’re getting close to paying off one, while others still seem pretty substantial. That’s where the debt snowball method comes in. This debt payoff strategy has you tackle your smallest debt first, giving you a quick win before moving on to the next.

The idea is to clear the smallest debts one at a time and build momentum. Once that first debt is gone, you take the money you were using for it and apply it to the next. You keep doing this until all your debts are gone.

This method is popular because it gives you quick wins — checking off those smaller debts on your list can be really motivating. While it doesn’t prioritize high interest rates like the debt avalanche method, it can be a suitable option if you need that extra rewarding push to stay on track.

If high-interest debt is what’s really weighing you down, the debt avalanche method could be your best bet. This debt payoff strategy focuses on taking care of the most expensive debt first — this might be credit cards, payday loans, or personal loans with high rates. Credit card interest alone can range from around 15% to over 25%, depending on your credit score, while payday loans can hit triple-digit interest rates, making them even more punishing.

With the debt avalanche method, you start by paying off debt with the highest interest rate. Once that’s done, you move on to the next-highest interest debt, continuing the process until you’re debt-free. The idea is that you save money in the long run because there’s less interest building up. Plus, you’re more likely to get out of debt faster.

What’s more, by getting rid of any high-interest debt, the interest you earn on savings becomes even more valuable, as it’s not getting canceled out by your debt interest. And this is especially so if you use a high-yield savings account to grow your money. So, if you’re keen to get your money working for you, this method could be ideal.

Once you’ve got your debts prioritized, the next step is to consider how much you can repay each month. Some find it helpful to create a budget that incorporates debt repayments right alongside their take-home pay. You list all the money you have coming in after taxes and then track your spending. Note down everything, from essential bills like rent to those optional extras. Bank and credit card statements can help with this process.

If you’re not sure how to get started, find out how to budget your money. A popular method to give structure to your spending is the 50/30/20 rule: put 50% of your after-tax income toward essentials (rent, mortgage payments), 30% to non-essential expenses (vacations, dining out), and 20% to debt repayments or savings. That way, you have a clear target for paying down debt each month.

Now you’ve created a budget, it’s easier to find areas to trim your spending, or even earn some extra cash. While you can’t avoid rent or mortgage payments, your budget might reveal some expenses you can live without. Cutting back here and there can free up more cash to put toward your debt.

If you’re open to it, finding ways to earn extra money — even temporarily — can speed up your debt repayments. You could look into taking up a part-time job, selling items you no longer need, or tapping into your skills for some freelance work. Side hustles like house sitting, driving for Uber, or dog walking can also give your debt payoff plan a boost.

And remember to check your savings rates. If you’re keeping your savings in a regular account, you could be missing out on better returns from CDs, money market deposit accounts, or other high-interest options.

Just like with budgeting, it’s important to keep an eye on your debt payoff plan. Set a schedule for your payments and track how you’re doing over time. That way, you’ll know exactly what needs to be paid and when.

If things change — like unexpected expenses or a sudden windfall — don’t hesitate to adjust your plan. Life happens, and being flexible will help you stay on track. Regular check-ins will also keep you motivated as you see your progress.

Beyond the strategies mentioned, there are various forms of debt relief that can make paying down debt even quicker and easier. These are often the recommended port of call if debt makes up half your income. Debt relief solutions can help reduce the amount you owe, lower interest rates, or extend payment periods to make monthly installments more manageable.

If you’re currently struggling with high-interest credit card debt, you can always take matters into your own hands by calling your credit card company to see if they are willing to offer better rates. You can prepare for this by gathering competitive offers from other credit card companies. While there’s no guarantee your request will be approved, it’s worth trying.

If, however, you’d prefer a company to take care of this process for you, there are debt relief companies that negotiate with creditors on your behalf, aiming to help you pay down debt more efficiently or improve payment terms.

Two common debt relief strategies include debt consolidation and debt management plans:

1. Debt consolidation: Combines multiple debts into one, often at a lower interest rate. Options include personal loans, balance transfers, or home equity loans, which simplify payments and may save on interest.
2. Debt management plan (DMP): Credit counseling agencies negotiate better terms with your creditors, and you make a single monthly payment to the agency. They distribute the funds to your creditors, helping you manage payments and avoid new debt.

If you’re currently struggling with high-interest credit card debt, you can always take matters into your own hands by calling your credit card company to see if they are willing to offer better rates. You can prepare for this by gathering competitive offers from other credit card companies. While there’s no guarantee your request will be approved, it’s worth trying.

If, however, you’d prefer a company to take care of this process for you, there are debt relief companies that negotiate with creditors on your behalf, aiming to help you pay down debt more efficiently or improve payment terms.

Deciding whether to go it alone with the debt avalanche or debt snowball technique or seek professional debt relief depends on your unique situation. If keeping up with payments feels overwhelming and your debt is affecting your daily life, it might be worth exploring options like debt consolidation or debt management plans.

However, keep in mind that the additional fees could worsen your financial situation. If your debt is manageable, you might prefer to handle it on your own. Also, consider how different debt relief options might impact your credit score; debt management plans or debt consolidation can sometimes negatively affect your score.

Dealing with debt can be overwhelming, but help is available. If you’re finding it hard to manage your debt, there are several organizations that offer free, impartial advice:

• National Foundation for Credit Counseling (NFCC): This organization connects you with certified credit counselors who can help you create a plan to manage your debt effectively.
• Debt.org: Resources and guidance on various debt relief options, including budgeting tips and debt management strategies.
• American Consumer Credit Counseling (ACCC): Credit counseling and education to help you understand your debt and find ways to tackle it.

Getting a handle on your debt is a huge achievement, but it is just one part of your financial health. Once your debt is under control, consider boosting your savings with Raisin. Raisin offers access to high-yield savings accounts, CDs, and more from federally regulated banks and credit unions. You can manage all your accounts with one login, and it’s free to open. Explore the Raisin marketplace, and see how you can get more from your savings today!

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

¹ https://www.businessinsider.com/personal-finance/credit-score/average-american-debt