4 steps to help manage your debt

Are you dealing with debt? Debt can help you achieve your goals, such as buying a home or getting an education to improve your income potential, but it can also be a source of stress and put a strain on your finances. Having a plan to tackle your debt can help you get in control, reduce anxiety and even help you save money.
In this article, we outline steps to help pay off debt while still setting yourself up for a financially sound future.
Know your debt
Start by understanding how much you owe and what kinds of debt you have. Make a list of all your individual debts (including credit card debt, mortgage, auto loans, student loans, medical debt and “buy now, pay later” loans) and their characteristics, such as interest rate and required payment.
If you have a hard time keeping track of your debts, your credit report includes a list of your debts along with information such as outstanding balances and payment history. You can request a free copy from each of the credit bureaus. For more information on how to request a credit report and fix errors, visit annualcreditreport.com.
Once you have a list of all your debts, add it all up to know the total amount you owe. Also, check your debt-to-income (DTI) ratio, which can give you a sense of how much of your income you’re allocating to debt. Your DTI ratio is your total monthly debt payments divided by your gross monthly income.
Explore debt optimization strategies
Once you know how your debt is structured, see if there’s an opportunity to reorganize it and make it work better for you. You might be able to lower and streamline your payments as well as change the type of debt you hold.
There are three strategies you could use:
- Refinance debt by paying off an existing debt using new debt (of the same type) that has different terms (e.g., replace an existing mortgage with a lower rate mortgage).
- Swap debt by paying off an existing debt using new debt (of a different type) that has different terms (e.g., use a home equity loan to pay off a credit card).
- Consolidate debt by paying off multiple existing debts using new debt (that could have different terms) to combine several payments into one (e.g., use a balance transfer to consolidate multiple credit card debts into one).
It’s important to understand that while debt optimization strategies might reduce your interest rate or payment amount, they won’t reduce the total amount of debt you owe. You’re simply replacing existing debt with new debt that has different terms.
If you're considering optimizing your debt, keep in mind that these strategies can have costs and come with certain conditions, so consider:
- Fees. These typically range between 2%–6% of the balance.
- Total interest paid. While extending the length of your debt can lower payments, this could result in paying more in total interest (even if your new rate is lower).
- New terms and conditions. Favorable terms on the new debt might only last for a limited time. Also, understand the new risks that might come with changing debt types (e.g., going from a fixed to a variable rate).
- Impact on credit score. Applying for a new credit can negatively impact your credit score (at least in the short term).
- Unsecured versus secured debt. Beware when trading unsecured debt (e.g., credit cards) for secured debt (e.g., home equity loan or securities-based lending). If you’re unable to pay it back, you may lose the assets that you used for the secured debt (e.g., your home).
Decide how much to allocate toward debt vs. other goals
If you are already making the minimum payments on your debts, you might be wondering whether you should use any extra funds to make additional debt payments versus saving toward your other goals. Remember, every dollar used to pay down debt is a dollar you won't be able to save.
At the end of the day, it's important that you balance paying down debt with other goals, such as making progress toward building an emergency fund and saving for retirement. In other words, while paying off your debt faster might sound tempting, it might not be the best move if you don't have a fully funded emergency fund or aren't saving enough for retirement (particularly, if your employer offers matching contributions). That said, you can reduce your debt faster and pay less in overall interest if you can make extra payments toward your debt without sacrificing progress on other goals.
Tip: Once you’ve determined how much you want to put toward each of your debts, set up automatic payments so you don’t miss any payments.
Prioritize your debt
The final step is deciding how to prioritize your debt. There are two main methods to consider: the avalanche method and the snowball method.
Avalanche method | Snowball method | |
---|---|---|
Approach | Pay debt with the highest interest rate first | Pay debt with the lowest balance first |
Benefit | Minimize interest payments | Build momentum by reducing the number of debts quicker |
Trade-off | Can be harder to stay motivated or see progress (particularly, if the higher-interest debt is large) | Pay more in interest |
We generally recommend focusing on paying down high-interest-rate debt first (such as credit card debt) following the avalanche method. In particular, pay debt with the highest after-tax interest rate first, since some interest, like mortgage interest, may be tax deductible. We favor this approach because it helps minimize interest paid. Also, higher-interest-rate debt tends to be revolving, which usually has a larger weight on your credit score.
While we advise starting with the highest-interest debt first, we understand that paying off small balances can be motivating. In that case, combining the two methods could be beneficial. Focus on small, high-interest rate debts first. Then, once those debts are paid off, tackle your remaining debts from highest to lowest rate.
How Edward Jones can help
Whether you have multiple sources of debt or just a few, it can be overwhelming. Having a roadmap to tackle your debt can give you clarity on your next moves and help you get where you want to go. Work with your Edward Jones financial advisor to create a strategy to pay down your debt that works for you and your goals.
This information is for educational purposes only and should not be interpreted as specific advice. Financial decisions should be based on each individuals unique situation.