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Ready to buy your own home? There’s a lot to consider, especially if this is your first time applying for a mortgage and you’re carrying debt. While having debt is not necessarily a deal-breaker when you’re applying for a mortgage, it can be a factor when it comes to how much you’ll be able to borrow, the interest rate you might pay, and other terms of the loan.

Understanding how the home loan process works can help you decide whether it’s better to pay off debt or save up for a downpayment on a home. Here’s what you need to know.

How to Manage Debt before Buying a Home

Understand Your Debt-to-Income Ratio

When lenders want to be sure borrowers can responsibly manage a mortgage payment along with the debt they’re carrying, they typically use a formula called the debt-to-income ratio (DTI).

The DTI ratio is calculated by dividing a borrower’s recurring monthly debt payments (future mortgage, credit cards, student loans, car loans, etc.) by gross monthly income.

The lower the DTI, the less risky borrowers may appear to lenders, who traditionally have hoped to see that all debts combined do not exceed 43% of gross earnings.

Here’s an example:

Let’s say a couple pays $600 combined each month for their auto loans, $240 for a student loan, and $200 toward credit card debt, and they want to have a $2,000 mortgage payment. If their combined gross monthly income is $8,000, their DTI ratio would be 38% ($3,040 is 38% of $8,000).

The couple in our example is on track to get their loan. But if they wanted to qualify for a higher loan amount, they might decide to reduce their credit card balances before applying.

That 43% threshold isn’t set in stone, by the way. Some mortgage lenders will have their own preferred number, and some may make exceptions based on individual circumstances. Still, it can be helpful to know where you stand before you start the homebuying process.

Recommended: How to Prepare for Buying a New Home

Consider How Debt Affects Your Credit Score

A mediocre credit score doesn’t necessarily mean you won’t be able to get a mortgage loan. Lenders also look at employment history, income, and other factors when making their decisions. But your credit score and the information on your credit reports will likely play a major role in determining whether you’ll qualify for the mortgage you want and the interest rate you want to pay.

Typically, a FICO® Score of 620 will be enough to get a conventional mortgage, but someone with a lower score still may be able to qualify. Or they might be eligible for an FHA or VA backed loan. The bottom line: The higher your score, the more options you can expect to have when applying for a loan.

A few factors go into determining a credit score, but payment history and credit usage are the categories that typically hold the most weight. Payment history takes into account your record of making on-time or late payments, or if you’ve filed for bankruptcy.

Credit usage looks at how much you owe in loans and on your credit cards. An important consideration in this category is your credit utilization rate, which is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. Put more simply, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. The lower your rate, the better. Many lenders prefer a utilization rate under 30%.

Does that mean you should pay off all credit card debt before buying a house?

Not necessarily. Debt isn’t the devil when it comes to your credit score. Borrowers who show that they can responsibly manage some debt and make timely payments can expect to maintain a good score. Meanwhile, not having any credit history at all could be a problem when applying for a loan.

The key is in consistency — so borrowers may want to avoid making big payments, big purchases, or balance transfers as they go through the loan process. Mortgage underwriters may question any noticeable changes in your credit score during this time.

Recommended: What Credit Score is Required to Buy a House?

Don’t Forget, You May Need Ready Cash

Making big debt payments also could cause problems if it leaves you short of cash for other things you might need as you move through the homebuying process, including the following.

Down Payment

Whether your goal is to put down 20% or a smaller amount, you’ll want to have that money ready when you find the home you hope to buy.

Closing Costs

The cost of home appraisals, inspections, title searches, etc., can add up quickly. Average closing costs are 3% to 6% of the full loan amount.

Moving Expenses

Even a local move can cost hundreds or even thousands of dollars, so you’ll want to factor relocation expenses into your budget. If you’re moving for work, your employer could offer to cover some or all of those costs, but you may have to pay upfront and wait to be reimbursed.

Remodeling and Redecorating Costs

You may want to leave yourself a little cash to cover any new furniture, paint, renovation projects, or other things you require to move into your home.

Be Aware of Housing Market Trends

Trends in the housing market may help you with prioritizing saving or paying down debt. So it’s a good idea to pay attention to what’s going on with the overall economy, your local real estate market, and real estate trends in general.

Here are some things to watch for.

Interest Rates

When interest rates are low, homeownership is more affordable. A lower interest rate keeps the monthly payment down and reduces the long-term cost of owning a home.

Rising interest rates aren’t necessarily a bad thing, though, especially if you’ve been struggling to find a home in a seller’s market. If higher rates thin the herd of potential buyers, a seller may be more open to negotiating and lowering a home’s listing price.

Either way, it’s good to be aware of where rates are and where they might be going.

Inventory

When you start your home search, you may want to check on the average amount of time homes in your desired location sit on the market. This can be a good indicator of how many houses are for sale in your area and how many buyers are out there looking. (A local real estate agent can help you get this information.)

If inventory is low and buyers are snapping up houses, you may have trouble finding a house at the price you want to pay. If inventory is high, it’s considered a buyer’s market and you may be able to get a lower price on your dream home.

Price

If you pay too much and then decide to sell, you could have a hard time recouping your money.

The goal, of course, is to find the right home at the right price, with the right mortgage and interest rate, when you have your financial ducks in a row.

If the trends are telling you to wait, you may decide to prioritize paying off your debts and working on your credit score.

Remember, You Can Modify Your Mortgage Terms

If you already have a mortgage, you may be able to make some adjustments to the original loan by refinancing to different terms.

Refinancing can help borrowers who are looking for a lower interest rate, a shorter loan term, or the opportunity to stop paying for private mortgage insurance or a mortgage insurance premium.

Consider a Debt Payoff Plan

If you decide to make paying down your debt your goal, it can be useful to come up with a plan that gets you where you want to be.

Because here’s the thing: All debt is not created equal. Credit card debt interest rates are typically higher than other types of borrowed money, so those balances can be more expensive to carry over time. Also, loans for education are often considered “good debt,” while credit card debt is often viewed as “bad debt.” As a result, lenders may be more understanding about your student loan debt when you apply for a mortgage.

As long as you’re making the required payments on all your obligations, it may make sense to focus on dumping some credit card debt.

Recommended: Beginners Guide to Good and Bad Debt

The Takeaway

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

When you consolidate your credit card debt, you typically take out a personal loan, ideally with a lower rate than you’re paying your credit cards, and use it to pay off all of your credit cards. You then end up with one balance and one payment to make each month. This simplified the debt repayment process and can also help you save money on interest.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Dealing with debt can be overwhelming and stressful. If you find yourself struggling to pay off multiple debts, the snowball method can provide a practical and effective strategy to regain control of your financial situation. This method, popularized by personal finance expert Dave Ramsey, focuses on paying off debts in a specific order to build momentum and motivation.

Read on to learn how the snowball debt payoff method works, including its benefits, plus alternative payoff strategies you may want to consider.

Building the Snowball

With the snowball method you list your debts from smallest to largest based on balance and regardless of interest rates. The goal is to pay off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, you roll the amount you were paying towards it into the next smallest debt, creating a “snowball effect” as you tackle larger debts.

Getting rid of the smallest debt first can give you a psychological boost. If, by contrast, you were to try to pay down the largest debt first, it might feel like throwing a pebble into an ocean, and you might simply give up before you got very far.

A Word about Paying off High-interest Debt First

From a purely financial perspective, it might make more sense to first tackle the debt that comes with the highest interest rate first, since it means paying less interest over the life of the loans (more on this approach below).

However, the snowball method focuses on the psychological aspect of debt repayment. By starting with the smallest debt, you experience quick wins and a sense of accomplishment right away. This early success can then motivate you to continue the debt repayment journey. In addition, paying off smaller debts frees up cash flow, allowing you to put more money towards larger debts later.

Recommended: How to Get Out of $10,000 in Credit Card Debt

Making Minimum Payments Doesn’t Equal Minimum Payoff Time

While you may feel like you’re making progress by paying the minimum balance on your debts, this approach can lead to a prolonged payoff timeline. The snowball method encourages you to pay more than the minimum on your smallest debt, accelerating the repayment process. Over time, as you pay off each debt, the amount you can allocate towards the next debt grows, increasing your progress.

The Snowball Plan, Step By Step

Here’s a step-by-step guide to implementing the snowball method.

1. List all debts from smallest to largest. You want to list them by the total amount owed, not the interest rates. If two debts have similar totals, place the debt with the higher interest rate first.

2. Make minimum payments. Continue making minimum payments on all debts except the smallest one.

3. Attack the smallest debt. Put any extra money you can towards paying off the smallest debt while making minimum payments on others.

4. Roll the snowball. Once the smallest debt is paid off, take the amount you were paying towards it and add it to the minimum payment of the next smallest debt.

5. Repeat and accelerate. Repeat this process, attacking one debt at a time, until all debts are paid off.

A Word About Principal Reduction

It’s a good idea to reach out to your creditors and lenders and find out how they apply extra payments to a debt (they don’t all do it the same way). You’ll want to make sure that any additional payments you make beyond the minimum are applied to the principal balance of the debt. This will help reduce the overall interest you pay and expedite the debt payoff process.

Perks of the Snowball Method

The snowball method offers several advantages:

•   Motivation and momentum The quick wins and sense of progress provide motivation to continue the debt repayment journey.

•   Simplification Focusing on one debt at a time simplifies the process, making it easier to track and manage.

•   Increased cash flow As each debt is paid off, the money previously allocated to it becomes available to put towards the next debt, accelerating the payoff timeline.

Alternatives to the Snowball Method

While the snowball method has proven effective for many, it’s not the only debt repayment strategy available. Here are three alternative methods you may want to consider.

The Avalanche Method

The avalanche method involves making a list of all your debts in order of interest rate. The first debt on your list should be the one with the highest interest rate. You then pay extra on that first debt, while continuing to pay the minimum on all the others. When you fully pay off that first debt, you apply your extra payment to the debt with the next highest interest rate, and so on.

This method can potentially save more on interest payments in the long run. However, it requires discipline and may take longer to see significant progress compared to the snowball method.

The Debt Snowflake Method

The debt snowflake method is a debt repayment method you can use on its own or in conjunction with other approaches (like the snowball or avalanche method). The snowflake approach involves finding extra income through a part-time job or side gig, selling items, and/or cutting expenses and then putting that extra money directly toward debt repayment. While each “snowflake” may not have a significant impact on your debt, they can accumulate over time and help you become free of high-interest debt.

Debt Consolidation

If the snowball, avalanche, or snowflake methods seem overwhelming, you might want to consider combining your debts into one simple monthly payment that doesn’t require any strategizing. Known as debt consolidation, you may be able to do this by taking out a personal loan and using it to pay off your debts. You then only have one balance and one payment and, ideally, a lower interest rate, which can help you save money.

Recommended: How Refinancing Credit Card Debt Works

The Takeaway

The snowball method offers a practical and motivational approach to paying down debt. By starting with small debts and building momentum, you can gain control of your finances and work towards becoming debt-free.

However, it’s important to choose a method that aligns with your financial goals and personal preferences. Whichever method you choose, the key is to take action and commit to a debt repayment strategy that works for you.

If you’re interested in exploring your debt consolidation options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a debt consolidation loan from SoFi is right for you.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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We humans like to take the easy road. We might notice the healthiest options on the menu, then order the fried everything. Or stare down a mountain of bills, then continue the same spending habits.

So how do we snap ourselves out of it? Committing to reducing debt can be kind of like committing to a healthier lifestyle. Because if you think about it, it is a healthier lifestyle.

But just like a diet probably won’t reduce your waistline overnight, a debt management plan isn’t likely to work magic on your finances right off the bat. If you tailor your plan to fit your life, however, it’s possible to see long-lasting changes.

Creating a Debt Management Plan

Laying Out Your Debt

You probably have questions. What is a debt-management plan? Simply put, it’s a way to get control over your debt. Does a debt-management plan work? That answer is up to you.

The first step toward defeating your debt could be to lay it all out on the table, and we mean ALL of it. The average total household debt in America, including credit cards, mortgages, car payments, and everything else, hovered at $101,915 in 2022, according to Experian. For some, that total number could be a real slap in the face. (It’s okay to ugly cry.)

One way to get to your total debt amount is to gather every statement, every bill, and every outstanding balance and input them all in one place, such as a spreadsheet or a spending tracker.

You might be painfully aware of your major debts. But are there others that could be slipping beneath the radar? Potential one-off or occasional debts can include financed household purchases, medical bills, or quarterly insurance payments.

One helpful way to make sure you’re looking at all your debts could be to scroll through your bank statements to look for recurring payments, especially if they’re set up on auto-pay. Another is to compare your list of debts to your credit report.

Categorizing and Conquering

Next, you may want to break it down even more by categorizing and prioritizing your debts. Generally speaking, there are two types of debt: secured and unsecured.

Secured debt includes things like mortgages and car payments that are tied to a physical asset. Unsecured debt isn’t tied to anything tangible, so it can include most credit cards and other types of loans.

Beyond that, you can group your debt by categories, such as high-interest, low- or zero-interest, fixed-rate, variable-rate, or even large balances and small balances.

As you start to list your debts, you could consider common elements such as each creditor’s name, the total balance, your monthly payment, the interest rate, and the expiration date for any promotional interest rates. For an added layer of insight, you could use a credit card interest calculator to understand how much total interest each might incur over time.

It might also be a smart move to prioritize your debt, putting those that could send you tumbling into the bad-credit abyss if you get behind on payments. For homeowners, that could be the mortgage. For commuters, car payments and insurance could be high on the list as well. You could ask yourself which of your debts absolutely must, without fail, be paid on time and in full each month, and put them at the top.

Putting Your Debt in Context

The final piece to your financial puzzle could be to look at your debt in context with the rest of your expenses, such as monthly bills, the grocery budget, gas, and retirement contributions, as well as your monthly take-home income.

Seeing everything together can help give you a solid feel for how much you’re spending (or overspending), and how much you can reasonably start to budget toward debt repayment. And remember that even if it’s only a few dollars to start, it’s still a start.

Picking the Right Debt-Management Plan

Financial gurus have developed a number of methods for getting out of debt, and have even given them fun names that can read like the financial version of A Song of Ice and Fire.

The Snowball, the Avalanche, and the Fireball

The snowball method: This strategy calls for paying the minimum on all your debts, but putting extra toward the smallest balance first. When that’s paid off, you could apply that entire payment to the next-smallest balance on top of the minimum. It’s one way to help get some quick wins and start to check balances off your list.

The avalanche method: This one is similar but focuses on interest rates instead of total balances. With the avalanche, you would pay the minimum on all your other debts but put extra toward the highest interest rate first and work your way down. This could work to save money on interest in the long run.

The fireball: This strategy is a mix of the others, and works for some by separating debt into “good” — which is generally considered to be fixed-payment, low-interest debt that’s on a set repayment schedule — and “bad” — such as credit cards and other unsecured loans. Then, using either the snowball or the avalanche, you could start burning through the “bad” debt first.

One way to narrow your choice is to research the pros and cons of all three methods, then pick the one that fits your style and personality. Or, since we’re talking DIY debt management, you could also pick the parts you like from each one and make it your own.

Once again, it’s kind of like physical fitness: Some people may struggle to lose weight because they haven’t found a diet their body likes. But once they make that connection, they might find it a lot easier to crush their goals.

And speaking of goals, they apply to your debt-management plan, too. You might want to plan a strategy that speaks not only to you, but to your endgame. Are you hoping to save enough to afford an electric car? Will you need to pay for daycare in nine months or so? At the end of the day, you can think about your debt payoff strategy as a way to get you where you want to go, when you want to get there.

The Snowflake Method

Another approach to consider is the “snowflake method,” which works by throwing any additional money that comes your way toward debt, including work bonuses, side-hustle income, or selling things you no longer need or use.

The snowflake’s stricter cousin, the “spending fast,” takes the concept a step further by encouraging users to live as austerely as possible. Instead of eating dinner out, for example, you could cook at home and put aside the money you would’ve spent toward debt payoff. Coffee shop stops? Nope. Make your own and put that $5 toward debt instead.

These two methods could either work on their own or as tactics to complement one of the larger strategies.

Consolidating Your Debt

Paying fees for late payments or overdrafts doesn’t help anything when the goal is reducing debt. If you find it difficult to keep track of what’s due when, combining all your separate payments into one credit card consolidation loan could be a way to focus on one monthly payment.

Consolidating your credit card debt might also include a number of other benefits, but it isn’t a magic cure-all. A loan will not erase your debt, but it might help you get to a fixed monthly payment and reduced interest rates.

It’s important to compare rates and understand how a new loan could pay off in the long run. If your monthly payment is lower because the loan term is longer, for example, it might not be a good strategy, because it means you may be making more interest payments and therefore paying more over the life of the loan.

Keeping Yourself on Track

The best strategy in the world may not lead to progress if you lose track of it after a few months. One way to stay on the right track could be to set up a bill payment calendar to remind you of what’s due when. You could write it down with old-fashioned pen and paper, or use something like SoFi Relay spending tracker for notifications and easy digital payment options.

If willpower is your challenge, you might want to consider enlisting the help of a debt buddy to help get you through the rough spots. It could be a trusted friend or family member who’s been in your shoes and succeeded. You could schedule regular check-ins, and maybe even challenge each other to a debt-payoff duel to spark a little competition.

Another option is to identify your weaknesses and put barriers in place that could save you from yourself. For example, if you tend to make in-app purchases to level up on phone games, you could block them.

Reducing debt is a big deal. And even if it takes years to reach your ultimate goal, be patient with yourself — and be sure to celebrate milestones along the way.

The Takeaway

When you’re creating a debt management plan, it helps to first lay out everything you owe. Next, you may want to categorize and prioritize all of your debts before selecting a debt management plan. Some options include the snowball method, the avalanche method, the fireball method, and the snowflake method. Another strategy is to combine all separate debts into one consolidation loan. While this won’t erase your debt, it could help you get to a fixed monthly payment and, potentially, reduced interest rates.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Debts fall into two broad categories: secured debt and unsecured debt. Though both types of debt share some similarities, there is one key difference. Secured debt is backed by collateral, and unsecured debt isn’t.

It’s important for borrowers to understand how secured and unsecured debt work. That’s because the type of debt you choose could impact such things as loan terms and interest rate and whether you can get credit, and can be one tool to help you determine the order in which you’ll repay the debt.

What Is Secured Debt?

Secured debts are backed, or secured, by an asset, such as your house. This asset acts as collateral for the debt, and your lender is what is known as the lien holder. If you default on a secured debt, the lien gives your lender the right to seize the asset and sell it to settle your debt.

Mortgages and auto loans are two common types of secured debt. A mortgage loan is secured by the house, and an auto loan is secured by the vehicle. You may also encounter title loans, which allow you to use the title of your vehicle to secure other loans once you own a car outright.

What Are the Possible Benefits of Secured Loans?

Because lenders can seize an asset to pay off the debt, secured loans are considered less risky for the lender than unsecured loans. “Low risk” for a lender can translate into benefits for borrowers. Secured loans generally offer better financing terms, such as lower interest rates.

Secured loans may also be easier for borrowers to qualify for. For example, secured loans may have less stringent requirements for credit score compared to unsecured loans, which generally rely more on the actual credit and income profile of the customer.

What Are the Stakes?

The stakes for borrowers can be pretty high for secured loans. After all, consider what happens if you stop paying these debts. (Timeframes for secured loan default can vary depending upon the type of secured debt and lender terms.) The bank can seize the secured asset, which might be the house you live in or the car you need to drive your kids to school or yourself to work.

Failing to pay your debt, or even paying it late, can possibly have a negative effect on your credit score and your ability to secure future credit, at least in the shorter term.

What Is Unsecured Debt?

Unsecured debt is not backed up by collateral. Lenders do not generally have the right to seize your assets to pay off unsecured debt. Examples of unsecured debt include credit cards, student loans, and some personal loans.

What Are Some Benefits of Unsecured Loans?

Unsecured loans can be less risky for borrowers because failing to pay them off does not usually result in your lender seizing important assets.

Unsecured loans often offer some flexibility, while secured loans can require that you use the money you borrow for very specific purposes, like buying a house or a car. With the exception of student loans, unsecured debt often allows you to use the money you borrow at your discretion.

You can buy whatever you want on a credit card, and you can use personal loans for almost any personal expense, including home renovations, buying a boat, or even paying off other debts.

What Are the Stakes?

Though unsecured loans are less risky in some ways for borrowers, they are more risky for lenders. As a result, unsecured loans typically carry higher interest rates in comparison.

Even though these loans aren’t backed by an asset, missing payments can still have some pretty serious ramifications. First, as with secured loans, missed payments can negatively impact your credit score. A delinquent or default credit reporting can make it harder to secure additional loans, at least in the near future.

Not only that but if a borrower fails to pay off the unsecured debt, the lender may hire a collections agency to help them recover it. The collections agency may hound the borrower until arrangements to pay are made.

If that doesn’t work, the lender can take the borrower to court and ask to have wages garnished or, in some extreme cases, may even put a lien on an asset until the debt is paid off.

Managing Secured and Unsecured Debt

Knowing whether a loan is secured or unsecured is one tool to help you figure out how to prioritize paying off your debt. If you’ve got some extra cash and want to make additional payments, there are a number of strategies for paying down your debt.

You might consider prioritizing your unsecured debt. The relatively higher interest typically associated with these debts can make them harder to pay off and could end up costing you more money in the long run. In this case, you might consider a budgeting strategy like the avalanche method to tackle your debts, whereby you’d direct extra payments toward your highest-interest rate debt first. (Be sure you have enough money to make at least minimum payments on all your debts before you start making extra payments on any one debt, of course.)

You can also manage your high-interest debt by consolidating it under one personal loan. A personal loan can be used to pay off many other debts, leaving the borrower with only one loan — ideally at a lower interest rate. Shop around at different lenders for the best rate and terms you can find.

Be cautious of personal loans that offer extended repayment terms. These loans lengthen the period of time over which you pay off your loan and may seem attractive through lower monthly payment options. However, choosing a longer term likely means you’ll end up paying more in interest over time.

The Takeaway

Secured debt is backed up by collateral, such as a house. Unsecured debt doesn’t require collateral. The type of debt a borrower chooses may impact things like the cost of a loan and whether they can get credit. It can also help determine the order in which debt is repaid. Since unsecured loans could have higher interest rates or fees, you may decide to consider prioritizing paying down that debt first. A budgeting strategy like the avalanche method may make sense, as it calls for directing extra payments toward highest-interest rate debt first. Consolidating high-interest debt under one personal loan, ideally at a lower interest rate, is another strategy.

If you are thinking about taking out a loan to consolidate your debt, a SoFi unsecured personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a personal loan from SoFi is right for you.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Americans are carrying record levels of credit card debt. And, with the average credit card annual percentage rate (APR) for purchases now averaging 24.59%, the interest on debt can be as crushing as the balance alone.

Getting out from under high-interest debt can seem like a daunting prospect. The good news is that there are ways to make the process more manageable and a lot less overwhelming. While it can take some time, using a mix of smart paydown strategies can help you reduce your debt, lower your interest rates, and put you on the road to debt-free living. Here’s a look at some of the best ways to reduce your credit card debt.

Start by Creating A Budget

If eliminating credit card debt is the destination, creating a budget is like the road map that gets you there. While it may sound like a complicated process, it doesn’t have to be. These simple steps will get you started.

1.    Gathering financials. It might be a little painful to comb through bills and account statements, but the more information you have from the start, the easier it will be to set up a realistic budget. Try to collect the last three months of these statements in digital or paper form:

◦   Mortgage/Rent

◦   Utilities (water, gas, heat, internet, cable, HOA, etc)

◦   Pay stubs

◦   Credit card and auto loan statements

◦   Student loans or other miscellaneous recurring loans and bills

◦   Subscription services (Amazon, Netflix, Spotify, etc)

Taking the time to gather these documents can give you a clearer picture of what you’re spending each month. It can also help you suss out easy places to cut back, such as a gym membership you no longer use or a streaming service you rarely watch.

2.    Determining expenses vs. income. Once your finances are all laid out, you can tally up your average monthly income (after taxes) as well as your average monthly spending. Hopefully, the amount you spend each month is less than the amount you bring in each month. You’ll also want to make a list of your usual expenses and divide them into essential and nonessential monthly expenses.

3.    Implementing budgeting guidelines. A budget is simply a plan for how you will spend your money. Once you see how you are currently spending your money, you may realize that your spending doesn’t necessarily line up with your priorities. There are many ways to look at budgeting, but one easy framework is the classic 50/30/20 budget. It doesn’t require complicated spreadsheets or tricky apps to get started. The 50/30/20 method simply stipulates:

•   Half a person’s take-home pay should go towards “essential spending.” This includes housing costs, health insurance, groceries, utilities, minimum payments on debt, and anything else you need to pay each month.

•   One-third of a person’s post-tax pay should be tagged for “discretionary spending.” This is spending you could cut back on if needed, such as meals out, entertaining, clothing, or a gym membership.

•   Finally, 20% of post-tax income should be set aside for saving and debt payoff. The rest of a person’s paycheck is ideally reserved for retirement, emergency savings, and making debt payments beyond the minimum.

The 50/30/20 budgeting method can work well for beginners because of its simplicity and flexibility. Trying to adhere to the percentages can sometimes show budgeters their blind spots, or perhaps highlight areas where they might need to improve. But, it can also be flexible. Depending on the cost of living in your area and your priorities, you may want to play with the percentages.

Recommended: How to Stop Spending Money

Paying More Than The Minimum

When you have multiple credit card accounts racking up charges and interest, it can sometimes feel overwhelming. You might be unsure which, if any, to prioritize for payoff, and end up just paying the minimum due on every card each month.

But, if you just make the minimum payment due you might be surprised to learn how much more you end up paying in interest as the account balance accrues. Paying more than the minimum amount owed each month could lead to saving in the long run since there’s a smaller balance to charge interest on. SoFi’s credit card interest calculator can give you a general idea of how much you could possibly save on interest by calculating different repayment options.

Debt Payoff Strategies

Paying off more than the minimum each month is great, but coming up with a payoff strategy could offer a better outcome in the long run. Employing a method that works for your lifestyle could result in things like building momentum, alleviating stress, possibly making it simpler overall to conquer debt.

There are a number of simple debt-paydown strategies but here are two popular ones to consider.

•   Snowball Like a snowball rolling down a hill, this method starts with the smallest debt balances first, then builds towards the larger balances. You start by listing your debt balances from smallest to largest, without considering interest rate. You then put extra cash toward the smallest bill, while paying the minimum on all of the others. Once that bill is eliminated, you put extra cash toward the next-smallest bill. You keep the pattern going until all debt is gone.

The snowball method sometimes gets a bad rap because focusing on small debt balances first could mean paying more interest in the long run. But this method can actually have a positive psychological effect. Wiping away smaller debts can give you a sense of accomplishment that helps you power through the rest of the debt repayment process.

•   Avalanche If small wins off the bat don’t matter much, then you might turn to the avalanche method. This strategy starts with paying down the biggest interest rate debt first, paying minimums on all other debts. You contribute all free cash to the bill with the highest interest rate until it’s paid down or off. Continue, paying down debt with the next highest interest rate. Keep going until all debt is gone.

This method allows you to save on interest payments over the life of each credit card balance. The downside is that it takes longer to see any “wins.” But, once things start moving, it should have an avalanche effect, with each loan toppling.

Consolidating Multiple Debts

Having multiple bills, due dates, and accounts can lead to confusion over amounts due, resulting in missed payments and late fees. For some, a credit card consolidation loan might help to cut through the confusion by rolling all their revolving debt into one unsecured personal loan.

How can a personal loan possibly help? If you have outstanding amounts owed on multiple cards, you may be able to consolidate all the debt into one personal loan with a single fixed rate payment.

What’s more, unsecured personal loans often come with a fixed interest rate that’s lower than the average credit card rate, which means less interest charges could accrue each month.

Depending on how quickly you pay off a personal loan, you could save money on interest over the life of the loan with a lower fixed APR. Streamlining debt can also lead to more peace of mind, as can having a set term with a final payment date, instead of a revolving debt like a credit card. Rather than having multiple open-ended debts of differing amounts with varied APRs, you end up with one payment a month, with one rate and a payoff date.

Unsecured personal loans aren’t for everyone. While their APRs are generally lower than credit cards, not everyone will qualify for the lowest possible rates. And taking out a personal loan is still taking out additional debt, so it’s important to weigh the ramifications of adding a loan to one’s credit history.

The Takeaway

If you’re struggling with high-interest debt, know you’re not alone. Also know that there are a number of ways you can tackle the problem. A good first step is to look at your current income and expenses, set up a budget, and select a payoff strategy (such as the snowball or avalanche method).

You might also consider consolidating your debt to simplify repayment and, ideally, lower your interest rate. If you’re curious about this option, SoFi can help. With a low fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a debt consolidation loan from SoFi is right for you.

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