How to Manage Debt Step by Step
Practical instructions for managing debt within your budget and finding better ways to pay what you owe.
5 steps you can’t afford to miss
There are the five basic steps you should always follow to manage debt in order to avoid credit problems and financial distress.
- Always pay your bills on time, because missed payments are extremely bad for your credit and lead to penalties.
- When possible, refinance or negotiate lower interest rates to minimize interest charges and make it easier to reach zero.
- Never allow credit card debt minimum payments to exceed more than 10% of your take-home income.
- Talk to your creditors ahead of time if payment challenges arise to make special arrangements, such as forbearance.
- As long as you won’t incur prepayment penalties, make larger or extra payments to eliminate debt faster.
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How to check that you’re managing debt effectively
In addition to making sure that the total minimum payment requirements on your credit card don’t exceed 10% of your income, you can also check your debt-to-income ratio periodically to ensure you’re not overextended.
A debt-to-income (DTI) ratio is the metric lenders use to make sure you qualify for a new loan. Lenders want you to have a DTI of 41% or less. For your purposes, you want to keep your ratio below 36%. That way, if you buy a car or get a loan, you can qualify easily and get your approval without any hassles.
We recommend checking your debt-to-income ratio every few months (one a quarter) to make sure you’re on track. If your ratio is over or even near 36%, you should take action to eliminate some of your balances. This is the best method for maintaining financial stability.
How to manage debt if your debt-to-income ratio is too high
It’s important to note that if your DTI is over 41%, you can’t get loan approval. However, you can get credit cards and take on credit card debt. You can also qualify for alternative financing solutions (AFS) that don’t require credit checks, such as payday loans. This is how you can get overextended with debt and end up with a DTI over 41%.
If your ratio is above 50% it’s a sign of debt problems and you need to take immediate action. Which actions you take depend on your financial situation, budget, credit and the types of debt you hold. Here are some options you should consider to help you get out of debt faster:
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Option 1: Refinance or negotiate for lower interest rates
This is something that you want to do routinely to make sure that you don’t overpay as you manage debt. It’s especially relevant for credit cards, which have relatively high interest rates. Particularly if your credit score has improved since you opened the account, periodically call creditors to ask for lower rates. This will help ensure you don’t waste money on unnecessary interest charges.
If you have excessive debt to repay, start by revisiting each if your accounts to see if you can negotiate. Call each creditor to ask them to reduce your rate. If you have been a loyal customer who always pays your bills on time, you have a higher chance of success. Lower your rates will allow you to pay off the actual debt you owe faster.
You should also review your loan agreements. If you have a high rate on an auto loan or student loans, reducing it makes it easier to repay. Just by reducing the rate, you can keep your monthly payments the same and still be out of debt sooner.
So, when you first see signs of potential debt problems, start with rate reduction first.
Option 2: Set up a credit card debt reduction plan
Once you have interest rates minimized, you can focus on debt elimination. The first place you’ll want to start is with a credit card debt reduction plan. You start here because credit cards have higher rates than most loans (except payday loans). If you eliminate your debts with the highest rates first, you save money.
There are two methods you can use to reduce debt within your budget. Which one you use largely depends on your financial situation. Watch this video to find out more.
Take Down Credit Card Debt
Learn about two proven methods of debt reduction that help you pay off debt faster by strategically targeting your debts. With the right strategy, you can minimize interest charges and get out of debt fast!
[On-screen text] Take Down Credit Card Debt: The Right Way to Fight High Balance Credit Card Debt
Narrator: Credit card debt can be one of the toughest enemies you face as you fight to protect your financial realm. Armored heavily with high interest rates, regular minimum payments often barely make a dent in these debts.
[On-screen text] There are 2 basic strategies to reduce debt effectively. The style you choose depends on your situation.
Narrator: Luckily there are two strategies you can use to fight back effectively. Which method you choose really depends on your situation.
[On-screen text] But first… you must know your enemy
Narrator: But first, you must know your enemy to craft an effective strategy to win the war.
[On-screen text] Average credit card debt per U.S. adult = $5,596; cards that have a balance month-to-month = $7,743; average no. of card per cardholder = 3.7
Narrator: Average credit card debt in the United States is over $5,500, and is even more when you focus only on those who carry balances over every month. And while the average number of cards is less than four, that number often grows to five to ten for those fighting against debt problems.
[On-screen text Fighting style no. 1: Tiger Style. For those with the power to take big bites out of debt every month. Debts to target: Highest interest rate first
Narrator: Now fight: Tiger Style!
[On-screen text] How it works
Narrator: Here’s how you make this strategy work.
[On-screen text] Maximize your fighting power: Streamline your budget, cutting unnecessary expenses and boosting cash flow
Narrator: First streamline your budget by cutting out expenses that you don’t absolutely need and this will maximize your power.
[On-screen text] Hold off smaller enemies: Maintain the minimum payments on all of your debts except one
Narrator: Hold off on smaller enemies by making standard minimum payments, then focus all of that power to deliver powerful blows to the next debt with the highest APR.
[On-screen text] Take down biggest threat first: Make the largest payment possible on the debt with the highest interest rate
Narrator: This style uses your credit power to take out your biggest enemies in debt first so you target your debts in order of the highest interest rate.
[On-screen text] Move on to the next biggest threat: Once the first debt is done, roll your cash over to the next highest APR debt
Narrator: Once that first big boss is down, move on to the second and focus the bulk of your power to defeating it next.
[On-screen text] Start clearing the field: As you work your way down, you’ll have more cash power to eliminate debt even faster – you gain more power as you go!
Narrator: As you work your way down, taking out each opponent with the highest APR, you’ll begin to clear the field and gain power as you go.
[On-screen text] Eliminate multiple enemies at once, when possible: Once the first debt is done, roll your cash over to the next highest APR debt
Narrator: By the time you get to your smallest enemies, you should have enough power to cut down several enemies at once until all debts are eliminated!
[On-screen text] Are you a tiger? You need power to be a tiger – if you don’t have a large volume of cash available in your budget, you won’t have the power necessary to take bites out of your biggest debt threats.
Narrator: Tiger style is best used by fighters with the financial power already available. So, if you don’t have much cash on hand, you may not have the power needed to take out those big enemies quickly. In which case…
[On-screen text] Fighting Style No. 2: Crane Style. Peck away at your smallest debts first to gain the momentum you need to win. Debts to target: lowest balance first
Narrator: Crane Style may be your best method.
[On-screen text] Find any available seed money to feed your fight
Narrator: Scour your budget for any little bit of cash you can use to eliminate debt and make minimum payments to keep your biggest enemies at bay.
[On-screen text] Keep combatants on the field: Keep up with minimum payments on all of your debts
Narrator: Target debts with low balances first because they’re easy to wipe out. Here’s how this strategy really works.
[On-screen text] Start by pecking away at your smallest debt: Devote all of your extra cash to make the biggest payment possible on your lowest balance
Narrator: This method pecks away at smaller enemies first so you can gain power as you start to clear the field.
[On-screen text] Each debt eliminated boosts your energy: Every time you pay off a debt, you eliminate that bill so there’s more cash to face bigger enemies
Narrator: Next devote your focus to taking down the debt with the lowest balance. You’ll gain monetary power each time you cut down a debt because there will be one less debt to eliminate.
[On-screen text] Work your way up to the biggest baddies: Once you’ve cleared out all of the small debts, roll those savings into the cash you’re using so you can take out the biggest threats.
Narrator: By the time you get to your biggest balances, you’ll have the power you’ll need to take them down!
[On-screen text] Are you a crane? If the debts that have the highest interest rates are also the ones with the biggest balances and you don’t have a lot of cash, then it makes sense to start at the bottom and work your way up.
Narrator: Crane style is best suited for debt fighters with limited cash flow who need to gain momentum as they battle.
[On-screen text] Consolidated Credit. When debt is the problem, we are the soluti8on. Call 800-210-3481, www.consolidatedcredit.org
Narrator: And remember, if you’re having trouble winning your battle, Consolidated Credit is here with reinforcements that can help you win!
Once you pick your strategy, you can see how long it will take using our credit card debt calculator. Just total up your credit card debt and take the average of all your interest rates. If you don’t know your minimum payment schedule, 2% is fairly standard for most major credit cards.
Option 3: Consolidate your debt
If you can’t reduce credit card debt within your budget within three years (36 payments), you need a better strategy. You must find a more efficient way to pay back what you owe. This usually involves debt consolidation.
Debt consolidation allows you to roll multiple debts into a single monthly payment. With credit card debt consolidation, you also simultaneously reduce or eliminate interest charges. This dramatically accelerates repayment and makes it easier to manage debt effectively, even on a limited budget.
It’s worth noting that credit card debt is not the only type of debt you can consolidate. You can also consolidate student loan debt and back taxes. In general, you must keep debts separate. So, you must consolidate each type individually. You may need multiple consolidation plans and it’s absolutely possible to run plans at the same time. Which leads us to…
Option 4: Seek professional help
There’s nothing wrong with consulting with a professional to get the help you need. People often resist reaching out because of feelings of embarrassment, fear, or just a desire to keep debt problems private. But sometimes you need a professional to help identify potential solutions and to help you unravel complex challenges.

When it comes to credit card debt, professional help usually involves contacting a certified credit counselor. Nonprofit consumer credit counseling provides professional debt analysis free of charge. You can learn about your options and find out which will work best, based on your total debt owed and credit.
In many cases, the credit counselor will recommend a debt management program. This consolidates your debt into a single payment through the credit counseling agency. They negotiate to reduce or eliminate interest charges with your creditors.
Debt management programs are effective if you have:
- Bad credit
- Too much debt to pay off efficiently on your own
- Failed to negotiate lower rates on your own
Here are a few examples of how debt management programs have helped borrowers pay off their debt faster and more efficiently:
Mickey from Apex, NCThe program is working great! This has given me the tools I need to rid myself of my accumulated debt faster than I could on my own.
Where he started:
- Total unsecured debt: $38,272.83
- Estimated interest charges: $22,837.22
- Time to payoff: 17 years, 10 months
- Total monthly payments: $1,530.91
After DMP enrollment:
- Average negotiated interest rate: 10.93%
- Total interest charges: $7,954.05
- Time to payoff: 4 years, 3 months
- Total monthly payment: $916.00
Karen from Orlando, FLThis has been a great experience. Customer service is great. Everyone is very patient and understanding.
Where she started:
- Total unsecured debt: $30,193.00
- Estimated interest charges: $17,610.00
- Time to payoff: 14 years, 1 month
- Total monthly payments: $1,207.72
After DMP enrollment:
- Average negotiated interest rate: 7.75%
- Total interest charges: $4,700.42
- Time to payoff: 4 years, 6 months
- Total monthly payment: $664.00
Jorge from Taylor, MiThe monthly interest amount was reduced to a small fraction of what I was paying before. Thanks!
Where he started:
- Total unsecured debt: $53,937.00
- Estimated interest charges: $31,477.00
- Time to payoff: 15 years, 3 months
- Total monthly payments: $2,157.48
After DMP enrollment:
- Average negotiated interest rate: 2.46%
- Total interest charges: $2,640.90
- Time to payoff: 4 years, 10 months
- Total monthly payment: $985.00
Consolidated Credit has helped over 6.5 million people find better ways to get out debt. Now it’s your turn! |
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