At a Glance

The average American has $90,460 in debt, including credit card debt, personal loans, mortgages, and student debt. In total, American household debt has hit a record $14.6 trillion in 2021, affecting more than 340 million people.

When you’re thousands of dollars in debt, paying it all off can seem impossible. However, creating a debt payoff plan—and sticking to it—can help you find success and become debt-free.

In this article, you’ll find:

How a debt payoff plan works

When you create a debt payoff plan, you’re looking at the total of all of your debts, choosing a debt payoff strategy, and setting and meeting small, SMART goals along the way. This means creating a budget, keeping track of your incoming and outgoing expenses, adjusting your spending, and taking steps to improve your credit score, debt-to-income ratio, and debt utilization.

Having a plan and documented strategy can help you see the end of your debt, and keep you motivated to continue to work toward financial freedom.

Creating a debt payoff plan

If you only have one debt, the plan can be simple: pay off as much as possible each month until the debt is gone.

However, if you have multiple debts, or a significant amount, creating a debt payment plan can help make it more manageable and realistic to pay off.

There are several steps to take to create a debt payoff plan. By working diligently and thoughtfully through each one, you’ll end up with a realistic plan to pay off your debts and gain more financial security.

1. Total your debts

The first step is knowing and documenting all of your existing debts. Using a spreadsheet, pen and paper, or an app, list out all your debts including credit cards, student loans, auto loans, personal loans, mortgages, medical bills, and others. Include details like:

  • Total balance
  • Monthly due date
  • Interest rate
  • Minimum monthly payment
  • Current monthly payment
  • Lender contact information
  • Your payment method

To choose the correct debt payoff strategy, you must first know how much you owe and how much you must pay each month.

Get organized!

2. Choose a strategy

The next step is to decide on a debt payoff strategy. There are a number of strategies to choose from so compare each strategy’s pros and cons to help you decide which one is right for you. The best strategies to pay off debt are:

The snowball method

With the debt snowball method, start by ordering your debts from smallest to largest. Don’t worry about interest rates, and instead focus on the total debt. Then, while continuing to make minimum payments on all of your debts, start putting all extra cash toward the smallest debt first.

Once you’ve paid off the smallest debt, start on your next smallest. And when that’s paid off, move on to the next. Continue until you’ve paid off all debts. Using this method can help keep you motivated to keep paying off the debts because you’re able to see them disappear one at a time.

To help get you started, estimate your savings and a debt-free date using our debt snowball calculator.

The avalanche method

Using the avalanche method means you’re prioritizing paying off the balances with the highest interest rates first.

Though you’ll make minimum payments on all of your loans, you’ll put as much extra money as possible toward the one that has the highest interest rate. Once that’s paid off, pay off the loan with the next highest interest rate, and so on until you’re debt-free.

While this method may seem more intimidating, it can help save you money on interest in the long run. To estimate your savings and get a debt-free date, try out our debt avalanche calculator.

Debt consolidation

Consolidating your debt means combining multiple debts into one, lower-interest payment. Depending on your goal, this could help you lower monthly payments in the short term, or save on total interest in the long run.

The best way to consolidate your debt depends on your own situation, but one option is through a debt consolidation loan. In this case, you’d take out a personal loan large enough to pay off all of your outstanding debt. The goal is that you have a lower interest rate on the personal loan than your other debts, so you saving money. You can use our debt consolidation calculator to help you get started.

Another way to consolidate your debt is to use a home equity loan, which is essentially a second mortgage you take out on your home. These are one-time lump sums with lower interest rates and are paid monthly until the loan is paid in full.

While a home equity loan for debt consolidation can have a lower interest rate, have tax-deductible interest, and not require a high credit score to qualify, there are also downsides. For example, you could lose your home if you don’t make payments on the loan. Your home value could also decrease, and, lastly, it’s not a quick process to apply and be approved for this type of loan.

Consolidating your debt can make it more manageable and less costly.

Balance transfers

Balance transfers allow you to consolidate your debt and lower your interest rate. This method may work best for you if you have a lot of credit card debt. With this method, you move all of your credit card balance to a new card that has a lower or 0% interest rate.

Essentially, you’re using the new card to pay off your old cards. You won’t have as high of an interest rate on the new card so you’re saving money in the long run. Plus, you’re consolidating multiple payments into one.

The downside is that most of the time, the lower or 0% APR rate is an introductory rate and is only offered for a limited time. If you don’t pay off the balance before the introductory period is up, you may be hit with a high interest rate on the remaining balance.

3. Build a budget

Make a list of your sources of income, and how much you bring home on a monthly basis, on average.

Then, make a list of all of your expenses. Focus first on essential expenses, such as mortgage or rent, utilities, transportation, groceries, and other required costs each month. Next, list out the non-essential expenses, such as entertainment, shopping, subscriptions, memberships, etc.

Calculate your debt-to-income ratio, which is the total of all monthly debt payments divided by your monthly income. A debt-to-income ratio is considered low if it’s 20% or lower, and it typically shouldn’t be higher than 40%.

Once you know how much you’re making and spending, create a budget. Figure out where you can cut spending to put extra cash toward paying off debt each month. You should also try to contribute a small percentage to savings each month.

A budget can help you find places to pull money from to put more towards debt.

4. Set goals

When setting financial goals, make sure they are SMART — specific, measurable, attainable, relevant, and time-bound. Your first goal doesn’t have to be paying off all of your debt. Instead, set smaller goals that you’re able to reach in shorter periods of time. This can help you stay motivated and feel accomplished.

5. Make extra money

Even if you’ve listed and prioritized your debts, decided on a payoff plan, and outlined a budget, repaying your debt can still seem overwhelming. This is where making extra money can come in handy.

You may choose to start a side hustle, sell some of the things you no longer use, work a second job, or extend hours at your current job. The key is not to burn yourself out but to find something flexible and sustainable that can provide another source of income. It’s also temporary, so everything extra you earn should go toward paying off your debt.

How to stick to a debt payment plan

Once you’ve chosen a debt repayment plan, set a budget, and set goals. The final step is to stick to the plan to pay off your debt. The sooner you can pay off your debt, the more you’ll save in interest and the more you can contribute to savings or use for other (more fun!) things once the debt is fully paid.

Here are a few tips to sticking to your debt payment plan:

  • Be realistic. You won’t pay off all of your debts overnight, or even in a few weeks or months in some cases. It may take months or even years to pay it all off, so the goals you set have to be realistic to keep you from getting discouraged.

If you’re feeling overwhelmed or anxious by your plan, it may not be realistic for you. Consider a different payoff strategy or another way to make money. Re-analyze your budget and goals and make sure they are something you can stick to and achieve.

  • Keep track. Have something physical that tracks your progress, because visualizing and seeing that progress can help you stay motivated. Use a spreadsheet, an app, or anything else that helps you physically see the progress you’re making.
  • Pay more when possible. Any extra money you earn should go toward your debt. This takes discipline and even sacrifice sometimes, but since it’s money you weren’t expecting, you won’t miss it if it doesn’t go into your bank account or isn’t spent. Making larger payments when you’re able can help you pay off the debt faster.
  • Be accountable. Tell friends or family that you’ve made a plan and are sticking to it. If you feel comfortable, share the plan with someone. They can help keep you accountable by checking in to make sure you’re sticking to it. If you’re struggling, perhaps they can offer you advice. If you’re the only one who knows about your plan, you may not stick to it as well.
  • Avoid more debt. If at all possible, avoid taking on any more debt until you’ve paid off what you already have. Don’t make big purchases if you don’t need to, and try to avoid using credit cards for little purchases that can add up quickly.
  • Get inspired and celebrate. Remember why you’re doing this in the first place. Think about what you’ll be able to do once you have more financial freedom and security from being debt-free. While your goals may be different from someone else’s, you have a unique reason you started down this path. Keep that in mind any time you get discouraged.

Also, don’t forget to celebrate your progress. This doesn’t mean going out and spending money, but it can mean a low-cost way to celebrate hitting your goal.

Keep your goals top of mind and celebrate when you reach them!

How a debt payoff plan helps improve your credit score

There are primarily two types of debt, both of which can affect your credit score: revolving and installment.

  • Revolving debt primarily comes from credit cards where you can carry a balance from month to month. You can borrow as much as you want (up to your credit limit), and the monthly payment varies depending on how much you spent that month.
  • Installment debt comes from things like mortgages, auto loans, student loans, and other fixed payments.

If you pay off your debt in full each month and make all payments on time, your credit score will improve. However, missing a payment, carrying high balances, or having a high credit utilization ratio can all negatively affect your credit score.

When you have a debt payoff plan, you’re working to make the minimum payments on your debts on time, which helps raise your score. You’re also working to pay off balances, so your credit utilization and total debt will decrease, which will also help improve your score.

Why it’s important to pay down debt

The dilemma between saving and paying off debt is real. If you’re torn between paying off debt or adding to your savings, you’re not alone. While there are pros and cons to doing both, and you can often approach both with a hybrid model, paying down your debt has a number of benefits.

  • Increase your financial security. Once your debt is paid, you’re able to spend and save smarter and will have more room in your budget to be financially secure.
  • Avoid the guilt. When you have debt, you may feel guilty spending money on other things in life. So, it’s easier to take on more debt to buy or do things you can’t afford. Paying off your debt ends this cycle.
  • Reduce stress. Debt can take significant tolls on your physical and mental health. The extra stress you have when worrying about paying off your debt will disappear when you’re debt-free.
  • Improve your credit score. As previously mentioned, paying off debt can help increase your credit score, which can make borrowing for big purchases in the future, such as a home, easier.
  • Save more. When you pay off your debt faster, you’re saving money otherwise spent on interest. You could end up saving thousands of dollars that you can then use for something else.