Debt Management Strategies

Andrew Weber is senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

If you’re in a debt payoff cycle, you aren’t alone. According to Northwestern Mutual’s 2024 Planning and Progress Study, debt in America is on the rise. Two-thirds of Americans have at least some personal debt, and the average amount (not counting mortgages) is just north of $22,700. Credit cards are the biggest culprit—and the number one source of debt for 28 percent of Americans.

Now for some good news: The right debt management strategies can help you pay down your balances and save on interest over the long run. Whether you’re buried in debt or doing a good job managing what you have, you might be wondering how to get out of debt for good. Here are five simple strategies to help reduce your debt load.

Debt repayment strategies

1. Get organized

The first step is getting clear on your debt. Get an understanding of:

• The amount of each open balance,
• The name of each lender,
• The minimum monthly payment for each account,
• The interest rate for each account.

Also note which balances are revolving accounts. (Credit cards fall into this category.) These are lines of credit that allow you to borrow up to a certain point. As you pay down your balance, your borrowing power increases because you’re freeing up more of your credit limit.

These accounts are different from lump-sum loans like a personal loan or car loan. You cannot add to these balances.

Seeing it all in black and white might feel overwhelming. Just remind yourself that you’re taking control of your finances—and knowledge is power. And remember that you’re not the only one in debt.

2. Prioritize which debts to pay off

If you’re looking for a motivation boost, the same Northwestern Mutual data mentioned earlier found that 64 percent of adults are prioritizing their debt. Also keep in mind that not all debt is bad. When used wisely, debt can actually be a powerful financial tool.

Now that you know what your debt balances are, start to think about what debt you’re going to prioritize paying off first. It’s okay to carry some “good debt,” but “bad debt” should probably get your attention first. Here’s the difference between the two:

Good debt

“Good debt” is debt with a low interest rate that helps your overall financial situation. A mortgage, for example, can allow you to buy a home and increase your generational wealth. Paying off student loans might be worth it if they funded your education and led to a better-paying career. As long as you’re making your monthly payments to “good debt” on time, your payment history can help strengthen your credit score. These debts don’t necessarily need to be at the top of your priority list, especially if other debt is costing you more money.

Bad debt

“Bad debt” is debt incurred on credit cards and other high-interest debt. This is debt you’ll want to tackle first. Paying bad debt as quickly as possible can save you money on interest and help end the debt cycle faster. So which debt should you pay off first? Consider the following factors:

• Interest rates: The balance with the highest interest rate represents your most expensive debt. The longer you keep it around, the more interest you’ll pay in the long term. Prioritizing these accounts is the basis of the debt avalanche method.
• Balances: Other debt management strategies prioritize your open balances. The debt snowball approach, for example, has you pay off your lowest balance first, regardless of the interest rate. Eliminating these debts can provide quick wins—and help you stay motivated to keep going.
• Delinquency: If you have any accounts that are in bad standing, you probably want to put those first. That includes balances that have a history of late payments or have been sent to collections. Setting these accounts right can help improve your credit score.

3. Lower your rates

You might switch cable companies if a competitor is offering a deal, so why not refinance your credit card debt at a lower rate? This can be key as you’re creating a financial debt payoff plan. If you have good credit, you may be able to qualify for a personal loan or consolidation loan. You can also consider:

• Moving your balances onto a balance transfer credit card that has a 0 percent introductory rate: There may be a balance transfer fee (typically 3 percent to 5 percent of the transfer amount), but it could allow you to save money in the long term. Just be sure you can pay off the balance before the promotional period ends—and interest kicks in.
• Refinancing your student loans: This can allow you to put multiple student loans into one new loan with a lower interest rate. Just be aware that refinancing federal student loans means losing some borrower protections. That includes the ability to go on an income-driven repayment plan.
• Refinancing your mortgage: This debt payoff move can unlock a lower mortgage rate, which could save you a significant amount of money. You’ll want to shop around and compare rates to find the best lender. A strong credit score can go a long way here.

4. Find additional ways to fund your expenses to avoid going into debt

While budgeting can have a negative connotation, it’s not meant to feel restrictive. When done right, it can give you greater control of your finances—and allow you to spend money on what really matters to you. Once you start tracking your spending, you might be surprised by how much you spend on things that aren’t aligned with your values. Cutting back on this type of spending can free up money that you can put toward your debt.

You can also look for ways to bring in passive income. Investing in bonds or certificates of deposit (CDs) can come in handy here. And while you’re paying down debt, you can keep some money in low-risk investments to continue growing your wealth over time.

You could also take on a side hustle. Driving for a ride-sharing service might be an easy way to make some extra cash. You can also consider freelancing or consulting within your industry, monetizing a hobby, tutoring, starting a blog or opening an online shop. There may be a money-making opportunity right under your nose.

5. Make it fun

Who says debt management strategies have to be boring? Some people make a game out of getting debt-free. Finding ways to make things feel easier—even fun—can help you stick with it. One option is to participate in a savings challenge. The 52-week money challenge, for example, involves saving a certain amount of money every week, which could help you pay off your debt a little faster.

You could also work with your advisor to set goals for paying off your debt. Your advisor can help you prioritize your debt and build in accountability so you’re able to get rid of bad debt. That way, you can put the money you were using to pay off debt toward more fun savings goals.

When deciding how to get out of debt, remember that it’s a journey, even if you experience some temporary setbacks. What matters most is continuing to work toward your goal. And don’t be afraid to celebrate the wins along the way.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.