Paying off debt, step by step
From listing what you owe to your last payment: what to do, in order, and the traps to avoid on the way.
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Time: one evening to plan, then a monthly habit
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Face the numbers
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You need your bills and interest information to put a plan together (CFPB).
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A bill calendar keeps every bill and its due date in one place (CFPB).
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AnnualCreditReport.com is the official source for free reports (FTC).
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If you are spending more than you earn, consolidating the debt will not fix it unless you cut spending or raise income (CFPB).
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The money left over is what you can put toward the debts.
Make room in the budget
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Even a small amount, put on the right debt, shortens the payoff a lot. The debt payoff calculator shows by how much.
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Some will accept lower minimum payments, waive fees, lower your rate or move your due date to match your payday (CFPB).
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New purchases add to the balance and the interest.
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The CFPB suggests starting with $500 and then raising the goal to $1,000, so a surprise does not go back on a card.
Choose a method
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It costs the least interest, though it may not feel like you are making progress at first (CFPB).
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You see progress sooner, but you may pay more in the end (CFPB).
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A plan you keep is better than a perfect one you drop.
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A missed minimum can mean fees and a higher rate.
Put it on autopilot
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Paying on the day you are paid avoids spending it.
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This “rolling” is what makes the plan speed up.
Watch out for shortcuts
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The promotional rate lasts a limited time, there is usually a fee, and new purchases on the same card get no grace period (CFPB).
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The company can raise the rate on all balances (CFPB).
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A lower payment may only mean a longer loan and more interest, and the low rate may be a teaser (CFPB).
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If you cannot repay a home equity loan, you could lose your home (CFPB).
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They can advise you on managing money and paying debts (CFPB).
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The collector must pause collecting the disputed amount until it replies. The notice comes in the first contact or within five days (CFPB).
Stay on track
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Debt-free
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Good to know
- The CFPB describes two basic strategies: the highest interest rate method and the snowball method. The first costs the least; the second shows progress faster. In the calculator’s example the difference is a few hundred dollars over two years.
- The most powerful tool is the extra payment. With $300 a month more than the minimums, the example of three debts is cleared in 26 months instead of 52 and saves about $3,900 in interest.
- A debt collector has to give you written information about the debt and 30 days to dispute it. If you do not recognize a debt, dispute it in writing within that period instead of paying it.
- Free credit counseling from a nonprofit can help you set up a plan. Be careful with companies that charge up front or promise to wipe out your debt.
- This list is for consumer debt in the US. Rules for collectors and for credit differ in other countries.
- Not financial advice. A nonprofit credit counselor can look at your whole situation.
Frequently asked questions
What should I pay off first?
Either the debt with the highest interest rate, which costs the least overall, or the smallest balance, which gives you a quick win. The CFPB describes both. Pick the one you will keep doing.
Should I save or pay off debt first?
Start with a small emergency cushion, $500 and then $1,000, so a surprise bill does not go on a card. Then put the extra money toward the debt that costs the most.
Is a debt consolidation loan a good idea?
It can help if the new rate is really lower and you do not run up the cards again, but a lower payment can just mean a longer loan with more interest. Compare the total cost and read the fees and the terms.
Does a balance transfer save money?
It can, if the promotional rate is low, you pay the fee, and you clear the balance before the rate rises. New purchases on that card get no grace period, and being more than 60 days late can raise the rate on every balance.
What do I do if a debt collector contacts me?
Read the validation notice. If the debt is not yours or the amount is wrong, dispute it in writing within the 30 days the notice gives you. The collector must pause collecting the disputed amount until it responds.
Next step
I’m not an accountant or a financial advisor. This is an estimate, for information only. Check with a professional before you decide.
For a plan you cannot manage, or for collectors who do not follow the rules, ask a nonprofit credit counselor, a consumer attorney or your state attorney general.