Blueprint for paying down your debt

If you want to do it yourself, you’ll need to start by getting organized. Take these three steps and you may surprise yourself with how much progress you can make on your own.

Step 1: Gather information and update your budget 

Collect your financial data—bank accounts, credit card statements, loans, and more. Gather some important details about each of your debts, too, including:

• Total debt outstanding (i.e., what you owe) and total debt available (e.g., your credit card limit)
• Minimum monthly payments
• Interest rates, including whether the interest rate can change over time and what would cause the change

If you don’t already have a written budget, create one—it can do wonders for your stress levels and peace of mind. And it can help you figure out how and when you can pay down your debts. Include the minimum payment for each debt to start; you need to at least make the minimum payment for each. You can increase these amounts later with any excess income you have (more on this below).

Step 2: Determine your debt repayment strategy 

There are three common strategies for paying down debt: the avalanche method, the snowball method, and debt consolidation. Let’s assume you have $100 per month available for additional debt payments and the following debt as we talk through each strategy.

Avalanche repayment method

Eliminate your highest-interest debts first—that’s the avalanche method. You’ll continue to pay the minimum monthly payment on all your debts, but you’ll apply the additional $100 to the debt with the highest interest rate first. In this case, that’s credit card A, and it will take you about 15 months to pay it down.

After you pay off credit card A, you have the $100, plus the $128 from credit card A to put toward paying down credit card B each month.

Now that you’ve paid off credit card B, you have the $100, plus the $128 from credit card A and the $165 from credit card B to pay down your personal loan each month. 

Continue paying off your debts until you’re left with your lowest-interest one. The avalanche method will minimize the total interest you pay over time.

Snowball repayment method

The snowball method focuses on more immediate gratification—pay off your smallest debt first and get the sense of accomplishment that comes with it. Since credit card A is also the smallest balance, you’ll start there.

After you pay off credit card A, you have the $100, plus the $128 from credit card A to put toward paying down your auto loan, the second smallest debt. 

Once you’ve paid off your auto loan, you have the $100, plus the $128 from credit card A and the $99 from your auto loan to put toward credit card B each month.

Keep paying off your debt balances until you’re left with your largest debt. The benefit of the snowball approach is the satisfaction of checking smaller debts off your list quickly. The downside is that you may pay more in interest over time by not focusing on the highest-interest-rate debts first.

Debt consolidation

Consolidating your debts means you combine multiple high-interest debts into one lower-interest debt. This strategy has two benefits: It reduces your interest costs and the number of outstanding debts you carry.

If you own your home, you may want to consider using a home equity line of credit (HELOC) for this because it tends to have a competitive interest rate. But remember that your house is collateral for your HELOC. If you struggle to pay down the HELOC after you’ve consolidated your debt, your house can be at risk.

Step 3: Get help from debt relief programs to avoid financial crises

Consider getting professional help if you can’t reduce your debts using a do-it-yourself approach. There are a few types of programs to think about:

Credit counseling—These organizations can guide you in managing your money and debt. They’ll offer educational services and review your entire financial situation with you, but you should be aware that these services may be costly, even if you work with a nonprofit.

Debt management plans (DMP)—DMP representatives will work with your creditors to negotiate more favorable repayment terms for your unsecured debt—debt that isn’t backed by collateral, such as a house for a mortgage. DMPs won’t necessarily reduce your debts, but they’ll help make the monthly payments fit your budget.

Debt settlement programs (DSP)—With DSPs, the goal is to get your creditors to accept less than full payment. If successful, you’ll end up paying less on your debts, but the cost to do so can be significant—it will likely hurt your credit score, it can take years to complete, you’ll pay fees to the company helping you, and there’s no guarantee of success. 

Beware of scams if you decide to go this route. Working with these groups will require disclosing sensitive financial and personal information, so be sure they can be trusted.

Help yourself recover from debt

Nearly everyone has debt to manage, but it doesn’t have to disrupt your finances and personal life, and you can get it under control. Before pursuing professional help—which comes with its own drawbacks—sit down and review your finances to see what you can do to free up money to pay down your debt. Decide on a debt repayment strategy that you’re comfortable with. And if you’re still struggling, there are companies out there willing to help. You’ll still have to do the hard work of paying down the debt, and you’ll have to pay for their services, but they may be able to help you negotiate better terms.

1 In August 2021, John Hancock commissioned our eighth annual financial stress survey with the respected research firm Greenwald & Associates. An online survey of 1,162 John Hancock plan participants was conducted between 8/4/21 and 9/3/21 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Greenwald & Associates are not affiliated, and neither is responsible for the liabilities of the other. 2 All figures are hypothetical and for illustrative purposes only.