5 Steps to Setting Up a Debt Repayment Plan

A couple sitting at a large table in an office co-working space, collaborating on a debt repayment plan on a laptop.

Dealing with debt can be a stressful experience, but having a good strategy can help you save both time and money. Here are five steps to set up a debt repayment plan that works for you.

1. List All Your Debts

Start by getting an idea of what you're up against. Log in to your loan and credit card accounts and gather the following information for each:

  • Remaining balance
  • Monthly payment
  • Interest rate

Having these details readily available in one place can help you prioritize which debts to pay off first, and as you regularly update the list, allow you to track your progress.

2. Set Debt Priorities

As you determine how to tackle your debt, it's crucial that you continue to pay at least the minimum amount due each month on every account. That way, you can avoid costly late charges and potential damage to your credit score.

If you can afford to pay a little extra toward your debt every month, consider which accounts to target first. Options include:

  • The debt with the highest interest rate: Focusing on these loans and credit cards first can help you maximize your interest savings.
  • The debt with the smallest balance: Paying off your smaller balances first can give you quick wins early on, helping you stay motivated.
  • The debt with the largest balance: This approach is less common than the other two, but if your largest balance is giving you the most stress, it could potentially give you some peace of mind to tackle it first.

If you're in a situation where you can't afford to make all of your payments, prioritize the debts that can impact you the most if you don't keep up. For example, defaulting on a mortgage or auto loan can result in foreclosure or repossession, and if you don't keep up with utility bills, you could lose access to water, gas or electricity in your residence.

3. Get on a Budget

If you're not already on one, now is an excellent time to create a budget. Start by reviewing your income and expenses over the last few months to get an idea of how much you earn and where your money goes.

As you categorize your expenses, you'll be able to identify areas of discretionary spending where you can cut back and allocate more money toward your debt repayment plan.

Going forward, you can also set monthly goals for your spending, including extra debt payments, to help you stick to your goals. Even after you've paid off your debt, setting monthly spending goals and tracking your expenses can make it easier to accomplish other important financial goals.

4. Consider Debt Repayment Strategies to Accelerate the Process

Beyond setting your priorities for paying down debt, there are a few major overhauls to your debt repayment strategy you can adopt going forward. These are ways you can speed up the payoff process, saving both time and money along the way. Depending on how you decide to prioritize your debt, one of these options can work hand in hand with your approach:

  • Debt snowball method: With the debt snowball method, you'll pay the minimum amount on each debt, and you'll add any extra payment you can muster to the minimum payment on your loan or credit card with the lowest balance. Once that debt is paid off, you'll take the combined payment and add it to the minimum payment on your next-smallest balance. You'll keep doing this until all of your debts are paid in full.
  • Debt avalanche method: The debt avalanche method works similarly to the debt snowball approach. But instead of targeting the account with the lowest balance first, you'll focus on the account with the highest interest rate.
  • Debt snowflake method: The debt snowflake method involves taking small everyday savings that you earn from things like using coupons at the grocery store, splitting a subscription service with a friend or getting cash back from a credit card, and putting that toward your debts. You can use this approach in conjunction with the snowball or avalanche method or on its own.

5. Research Debt Payoff Tools and Apps to Help

Depending on your credit situation, you may be able to qualify for a debt consolidation loan or a balance transfer credit card, which could potentially help you save money.

  • Debt consolidation loan: A debt consolidation loan is a personal loan used to pay off high-interest debt, particularly credit cards. Personal loans offer set repayment terms, which can range from one to seven years, and depending on your credit history and income, you may be able to snag a low interest rate. That said, some personal loans charge an upfront origination fee of up to 10%, so take your time to shop around and compare multiple borrowing options.
  • Balance transfer credit card: Balance transfer credit cards, which typically require good credit to get approved, offer introductory 0% APR promotions, allowing you to transfer debt and pay it off interest-free for up to 21 months in some cases. Just note that these cards typically come with a balance transfer fee of 3% to 5%. What's more, if you don't pay off the balance in full before the promotional ends, the regular APR will kick in on the remaining amount.

You can also look into debt payoff apps, which utilize different tools and strategies to help you pay off your debt faster and save more money. These apps can be particularly useful in keeping track of your progress.

Prioritize Your Credit Score as You Pay Off Debt

Regardless of how you approach your debt repayment plan, it's important to monitor your credit, both to understand how your actions impact your credit score and to identify potential issues throughout the process. With Experian's free credit monitoring service, you'll get access to your FICO® Score and Experian credit report, and also get real-time alerts when changes are made to your report, so you can act quickly to resolve potential problems.