How to Plan and Prioritize Debt Repayments

Accomplish debt repayment by planning and prioritizing your outstanding obligations.

Key takeaways

  • Create a budget to determine your monthly minimum bills and debt obligations before allotting income to debt repayment.

  • Effective debt repayment plans are tailored to your circumstances and provide flexibility.

  • Prioritize your debts according to interest rate, balance owed or timeline for repayment.

Is stress over debt repayment keeping you up at night? You are not alone. More than half of Americans say that finances cause them more stress than almost anything else. And with credit cards, mortgages, auto and student loans to pay back, it’s easy to become overwhelmed.

You can plan and prioritize your debt repayments by tailoring your strategy to your needs and goals. To design your own debt repayment plan, consider your budget, income and creditworthiness.

Thinking about your debt like this will enable you to create a unique and achievable plan based on methods including the snowball, avalanche, reverse snowball or other methods.

Here's how to create a debt repayment plan, in 4 steps

First, understand that not all debt is bad. Low-interest debt in the form of a mortgage, home equity loan or student loan may be part of your long-term financial plan to help you achieve your goals. But high-interest debt like credit card debt is not considered good, or productive, debt. A well-strategized debt repayment plan can help you eliminate that debt.

To build your debt repayment plan, consider the types of debt you hold. For example, debt comes as either a revolving balance (e.g., credit card) or an installment loan (e.g., personal or student loan).

Follow these steps to plan and prioritize your debt repayment plan.

1. Confront the facts

Any debt repayment plan requires you to know what you owe. Start by listing all outstanding debts, including credit cards, student loans, car loans, mortgages and other.

2. Prioritize your debts

Not all debt comes on equal terms. Different credit cards and installment loans carry various interest rates. For example, the interest rate charged on credit cards can vary from 10% or lower to as high as 30%. Installment and other personal loans, on the other hand, tend to carry rates lower than 10%.

This means you want to consider whether paying off the debt(s) with higher interest rates first is beneficial. While this would save you money in the long run, it may mean that you’ll be putting off repaying lower-interest debt until further into your plan.

Other factors to think about include whether you have any debts in collections, your overall income and your monthly budget.

3. Understand your monthly budget

To repay your debts, you have to understand your budget. Ask yourself:

What are my essential expenses (e.g., housing, utilities, food, transportation, other bills)?

What is the minimum monthly payment I must make for each type of debt?

Where can I cut expenses?

Subtract your baseline costs from the take-home pay to determine your discretionary income. Even if you don’t have a significant amount of discretionary income to put toward your debt repayment plan, any amount is better than nothing.

4. Select a repayment strategy

Now that you understand your finances, it’s time to decide which strategy is best for you.

To plan your debt repayment strategy, consider methods like the avalanche and the snowball.

  • Snowball method: Pay off your smallest balance first, then move to the next-smallest balance. This approach provides an early “win” for those who need early motivation.

  • Avalanche method: Save money long-term by paying off the debt with the highest interest rate first.

  • The “reverse” snowball: Start with your biggest balance first. While paying off a debt will take longer this way, it may motivate you to have the largest debt out of the way.

WATCH: How To Pay Off Debt (Debt Snowball vs Debt Avalanche)

You can also use the combination strategy. Ultimately, the best repayment plan is the one that works for you. Perhaps the motivation provided by paying off a credit card in full will guide you toward the snowball method. Then, after you pay off that first card, you might want to focus on the card with the highest interest rate. Find a strategy that works for you and stick to it, knowing it will take time to pay off all debt.

Final considerations

Tackling outstanding debts can be scary. However, by planning and prioritizing your debt repayment plan, you can take control of your finances and achieve independence.

To find success, consider whether extending your working hours or finding part-time employment is possible. You may also be able to qualify for a balance transfer card, which would transfer debt from a higher-interest card to a lower-interest card.

Another possibility is a debt consolidation loan, which is essentially a personal loan that you use to pay off your high-interest debt(s), leaving you with just one monthly payment at a lower interest rate.

Unlock is here to help you repay your debt

If you’re a homeowner who has built equity in their home, one way to pay off your outstanding debts is by using a home equity agreement (HEA). At Unlock, our financial staff specializes in helping homeowners access the equity they’ve established in their homes. If you are in that position and need cash, an HEA may be right for you.

To learn how Unlock can help you repay your debts, contact us today.