Paying off debt — where do you start?

If you’re in debt, you’re in good company. Americans’ debt climbed to a new high of $13.29 trillion in the second quarter of 2018, according to the Federal Reserve Bank of New York.

But when you’re in debt, it’s easy to feel overwhelmed. And it’s difficult to know exactly where to start to climb out of the financial hole. Here are some tips to help you begin tackling your debt.

1. Know what you owe

Do you have multiple credit cards? A home equity or car loan? A mortgage? All of the above? If so, start your debt reduction plan by getting a complete picture of everything you owe. List all debts individually in a Google or other spreadsheet. Create one column for each debt’s Annual Percentage Rate (APR) or interest rate; a column for the minimum monthly amount due; and another column for the current total amount due.  

If you’re not experienced with spreadsheets, don’t worry. There are plenty of templates—pre-designed spreadsheets—available for free, such as these downloadable debt reduction spreadsheets from Squawkfox.com.

Or just use a pencil, a piece of paper, and a calculator. The point is, use whatever method or tool you’re most comfortable with. The last thing you want to do is create a roadblock.

2. Set goals and priorities

Once you have a full picture of your debt, you can develop a strategy. Start by setting goals and establishing priorities based on what you owe.

Let’s say you have three credit cards, each near their maximum credit limits. One card’s APR is 17.5%; another card’s rate is 8.9%; and the third is 22%. In this scenario, you could begin by paying as much as possible on your highest-rate card. The quicker you pay off that card, the more you’ll save in interest rates. Meanwhile, you could pay just the minimum monthly payment on your other cards. This is called the debt avalanche method, by the way.

Once the highest-interest rate card is paid off, focus on paying off the card with the second-highest interest rate. And then the third. The avalanche method is ideal if your goal is to reduce your spending on interest rates as quickly as possible.

With the debt snowball method, in contrast, you focus on paying off the loan with the lowest balance first, regardless of interest rate. The advantage: You may pay off a loan quicker, which can give you a psychological boost. The downside is that you pay more in interest rates over the long haul.

Another approach is to focus on paying off the debts that may help boost your credit score. This could be your strategy if you’re planning to buy a home, refinance your mortgage, or make some other large financial commitment in the near future. The better your credit score, the better your chances are of getting the loan you need and at the lowest possible rate.  

Keep in mind that your level of debt makes up 30% of your credit score. And the higher your credit card balances are in relation to your credit limit for those cards, the more your credit score suffers. So if you’ve got a credit card that’s near its credit limit (or worse, over the limit), this would be the logical place to start paying down your debt.

Bottom line: Decide what’s most important to you, as well as what’s most comfortable and ‘do-able.’ Then set your debt reduction goals and priorities.

3. Consider a balance transfer—cautiously

If you have one or more high-interest rate cards, consider moving that debt to a card with a 0% rate for balance transfers. You can save hundreds of dollars in interest rates.

But there are some potential traps with this strategy. First of all, opening a new credit card can hurt your credit score. In addition, you’ll need to be extremely disciplined and only use the card for the balance transfer—and not to make new purchases. Finally, be prepared to pay off the card before the 0% interest rate disappears.

4. Dedicate extra money toward paying down debt

Do you typically get a holiday bonus? Did you recently come into a lump sum of money you weren’t expecting? If so, use some or all of that money to pay down debts, rather than spending it on new stuff.

5. Create a budget

To put more money each month toward debt reduction, you’ll need to figure out where that money will come from. That means you’ll need to create a budget. Without a budget, you may end up paying more than you can afford toward debt—which could backfire by causing you to go into debt deeper.

Creating a budget doesn’t have to be hard. Check out these Spotloan blog posts to help you get started:

“8 ways to build a personal budget you can stick with”

“How to stick to a personal budget”

"Other Savings Tips & How Tos"

Additional Resources

“How to Use Debt Avalanche” (NerdWallet)

“How to Use Debt Snowball” (NerdWallet)

“How Opening a New Credit Card Affects Your Credit Score” (The Balance)