3 steps to improving your debt picture

Whether you’re just starting out in your career or are already retired, you may have debt you’ve incurred along the way. About three quarters of Americans owe money for everything from student loans and auto loans to mortgages and medical bills.¹ Being in control by knowing how to manage debt can improve your financial health, stress level and even your relationships.² These practical steps can put you in the driver’s seat and strengthen your financial health.

Get a clear understanding of your debt by putting your debt information in one place. Use our debt assessment chart, spreadsheet, app, notebook or whatever works for you.

For each debt you list, include:

• Type of debt (credit card, mortgage, etc.)
• Monthly payment amount
• Due date
• Interest rate
• Outstanding amount owed
• Notes such as fees or penalties for late payments 

Once you’ve listed all your debts, you’ll be able to see the full scope of who you owe, how much and what it’s costing you.  

You can also identify which debts are “good” vs. “bad.” Good debt typically has lower interest rates and can help improve your longer-term financial outlook. For example, a mortgage allows you to build equity as you work toward owning a home. On the other hand, bad debt typically has high interest rates and doesn't better your financial future. High-interest credit card debt and paycheck advance loans can quickly lead to greater debt because of hefty financing rates. It’s best to avoid these kinds of debts or pay them off as quickly as possible.

Determine the percentage of your monthly income that goes toward debt, known as your debt-to-income ratio. This number can help you gauge whether the amount you owe takes up too big a portion of your budget. Lenders typically look at this number when deciding whether to extend credit, such as a loan, credit card or refinancing.  That’s because if the amount of debt you carry takes up too much of your income, you’ll be less likely to be able to pay it back.  Lenders consider a good DTI ratio 35% or less. 

To calculate your DTI ratio: 

• add up your monthly debt payments
• divide the total by your gross monthly income (your income before taxes and deductions) 
• multiply that number by 100

For example, if your gross monthly income is $4,000 and your total debt payments equal $1,000, your DTI ratio is: 

$1,000/$4,000 x 100 = 25%

If your DTI exceeds 35%, making a plan to pay off debt can help you get back on track.

There’s more than one strategy for tackling debt, so you’ll need to choose the one that works for you. Whatever your approach, be sure to include debt payments in your monthly budget so you’re more likely to stick with your plan. (Don’t have a budget? Check out our budgeting tips and worksheet to get started.)

These commonly used methods for paying off debt provide a framework and help you set goals. Consider which one may be right for you. Then, commit to getting started!

With this method, you make the minimum payments on all your debt but use any extra funds to pay more on debt with the highest interest rate first (see “The debt avalanche method” chart). Once you’ve paid off the first debt, you apply the money you’d been paying on that one toward the debt with the next-highest interest rate and so on, until your debt is paid in full.

This method can potentially save you the most money in the long run since you’ll be paying less interest overall. 

For those who prefer to start small, this method involves paying off debts one at a time starting with the lowest balance first (see “The debt snowball method” chart). While making minimum payments on all your debt, you apply any extra funds toward the smallest one. Once you’ve paid off the first one, you put the money you’d been paying on that debt toward the debt with the next-lowest balance and so on, until eventually you’ve paid them all off.

Now that you know these 3 simple ways to improve your debt picture, get started today. Assessing your debt, calculating your debt-to-income ratio and committing to debt-payoff can put you on the path to a better financial future.