How to reduce debts 11 steps you can take

By Nooreen B
Modified on May 9, 2023
how to reduce debts

Almost every American has some debt, and that is relatively normal. However, some of us may have more debt than we can handle or simply want to be debt free. Reducing debts may seem challenging if you are juggling a lot and are overwhelmed or haven’t taken that step before. However, there are some easy ways to get started. Continue reading to learn more about a few simple strategies to reduce debts. 

Reducing Debts by Budgeting

Budgeting can be a great tool if you struggle with prioritizing debt repayment. It establishes a plan for your money to ensure that your short-term and long-term financial goals are being reached or at least on track. 

The fundamental way that any budget works is that you figure out your expenses and income and then figure out a way to allocate your money based on what you want to focus on. For example, some people may want to focus on saving, so much of their income may go towards that. While others may want to save for something like buying a home, which means most excess income will likely be allocated to a savings fund for that down payment. 

There are all kinds of budgets out there that can help you pay off debt, for example, the 50/30/20 method or the envelope budgeting method. The great thing about using these is that you’ll have a basic template to follow, and you can adjust it to match your savings goal. For example, with the 50/30/20 method, the last 20% is meant to go to savings. However, if your goal is to reduce debt, that 20% can go towards that. 

Overall, budgeting can be a great tool to begin prioritizing debt repayment. 

Different Approaches To Pay Off Debt 

There are some debt payment strategies out there that can help you pay off debt aggressively, while others will be more steady and slow; no matter how you want to start, the following strategies will help: 

The Avalanche Method

The avalanche method is an aggressive way to pay off debt. With this method, you will make monthly minimum payments on all your debt balances and focus on paying off as much as possible with your highest-interest debt. And once that debt is paid off, you move on to the following highest-interest credit account and so forth. This method usually works well if you are trying to pay off a lot of credit card debt.

The Snowball Method

The debt snowball method is similar to the avalanche method, but instead of tackling the high-interest debt first, you will start with the highest debt amount and so on. With this method, you can gain momentum, which can be motivating, especially after you pay off your highest debt. 

Paying More Than the Minimum Amount To Get Out of Debt

Paying more than the minimum amount due every month can be another good way to pursue debt payoff. You can decide on your own which debts you want to do this with, or you can do this with all of your monthly payments. You can also choose how much more you want to pay each month. 

With this strategy, you’ll pay off your debts much sooner and reduce the interest you will have to pay. 

With all these benefits, it won’t hurt to try this method, as long as you are mindful of how much money is coming in and your other necessary expenses. So, consider paying more than the minimum payment for debt reduction. 

Seeking Professional Help Through a Credit Counseling Agency

A credit counselor or credit counseling agency can help you figure out a debt repayment strategy if you are having trouble doing it independently. You’ll need to provide them with an accurate account of your financial situation, and they will help you from there. You can find many federally funded organizations, which means no cost to you. These services may be available in person, online, or over the phone. Start with the Financial Counseling Association of America and the National Foundation for Credit Counseling. 

Using All Extra Income on Your Debt Payments 

This method is one of the simplest forms out there; all you have to do is to allocate any influx of income to pay off your debts. For example, an income bonus, your tax refund, gifts or rewards, or any other thing that means more money should all go towards paying off your debts. 

Debt Consolidation, Balance Transfers, and Debt Refinancing

Whether you have student loan debt, credit card balances, medical bills, a personal loan, a home equity loan, or any other type of loan, you may be able to get a lower interest rate on it, making it easier and faster to repay. You can do this with debt consolidation (for multiple debts) or refinancing (for one debt). Balance transfers are usually used for credit cards. So how exactly do debt consolidation loans, balance transfers, and debt refinancing work? Learn more about these options below: 

Consolidating Debts

Debt consolidation is the process of paying off multiple debts with one single loan. And so instead of having multiple monthly bills with different interest rates, you’ll have a single payment. A debt consolidation loan will help you pay off those debts; these loans are available online and in person. This process aims to get you better interest rates and a more manageable repayment plan than you previously had with your credit accounts. There are consolidation loan options available even if you have bad credit

Debt Refinancing

Debt refinancing is using one loan to pay off another and then paying back the new loan. Similar to consolidating debts, refinancing’s goal is to get lower interest payments and an easier-to-pay-back loan. You can use almost any credit account to refinance existing debt. 

Balance Transfers

Balance transfer cards are credit cards that allow you to transfer existing credit card bills/balances from several different credit card issuers (if needed) into one single credit account. The convenient thing is that you may be able to find a balance transfer that has very low or sometimes zero percent interest rates for an introductory period! This can be a great way to jump-start your debt reduction goal! However, with lower credit scores, you may not be eligible for a balance transfer on your own, but a cosigner or co-borrower can help. 

What About Bankruptcy and Debt Settlement?

Bankruptcy and debt settlement are both forms of debt relief but are usually the last resort. Below is more information on each: 


You can pursue two kinds of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 discharges you of most of your unsecured debt, while Chapter 13 means negotiating with your debtors. Bankruptcy can mean debt relief, but it will come at an extremely high cost. Bankruptcy will significantly reduce your credit scores and make it difficult to get financial products and services for a decade or longer.  

Debt Settlement

Debt settlement is working with your creditors to create a new payment plan or balance amount. This step will definitely help with credit account manageability, but it will also show up on your credit reports and negatively impact your credit. 

And so, although bankruptcy and debt settlement can help reduce or eliminate the burden of debt, they should be a last resort option because of the negative impact. Instead, pursue the strategies above first. 

Things You Need To Do When Prioritizing Debt Payments

If you do pursue debt reduction, there are some things you can do to ensure that you make progress! Here are some things to consider for the best outcome: 

  • Avoid new debt if possible, and educate yourself on good debt vs. bad debt. 
  • Build an emergency savings fund to protect yourself from going into further debt in the future. 
  • Increase your income if possible!
  • Learn about good and bad spending habits, and determine whether you need a plan to help yourself. 
  • Educate yourself on the basics of credit scores. 
  • Keep paid-off accounts open! 
  • Avoid cosigner or co-borrowing on a loan. 

How Does Debt Impact Your Credit?

Any debt you take on will appear on your credit report; information on the lender, amount, and payment history will all be a part of that. A few ways debt impacts your credit scores are through your credit utilization and debt-to-income ratio. Your credit utilization measures the amount of existing debt you have in relation to your available credit. The more debt you have, the higher your ratio; anything above 30% will harm your score. While your debt-to-income ratio is the amount of debt compared to your income. Having a lot more debt than what you make will be harmful. 

Payment history on your credit accounts will significantly impact your credit scores. A single late payment will harm your score and show up on your credit reports for up to seven years. And having more debt than you can manage will make it more likely for missed payments and even loan default! 

What is credit counseling? | Consumer Financial Protection Bureau

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