Monthly Finance Message:

Five Steps to Pay Off Debt

September 2011

Barbara O'Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

One of the characteristics of a financially successful lifestyle is to have little or no debt and a good credit score. Ideally, being debt-free is the best position to be in. Over a third of your credit score is based on your debt repayment history and 30% is based on your credit utilization ratio. This is the relationship between the amount that you've borrowed and your maximum credit limit. For example, if you have a $10,000 credit limit and a $1,000 balance, your ratio is a 10%. Borrow $9,000, however, and the ratio jumps to 90%. The lower your credit utilization ratio, the better.

Let's say you have a healthy debt balance and want to whittle it down as quickly as possible. What to do? First, look for additional income to make larger payments to your creditors. If additional work is not possible or practical, consider measures such as bartering or renting or subletting part of your home. In addition, make sure that you're taking full advantage of available government benefits such as the earned income tax credit (EITC), utility assistance, public health clinics, and food stamps, if eligible.

Next, work on the expense side. Be willing to forego non-essential expenses such as lattes, junk food, and premium cable channels to "find" money to pay down debts. Keep track of your spending for a month or two to help identify these expenses. Use strategies such as limiting the number of shopping trips and/or shopping with a list to discourage impulse buying.

Third, think twice before adding new debt. For regular expenses, either use your credit card as a charge card, paying the balance in full every month, or use some other form of payment such as a debit card, check, or cash. For larger purchases financed with an installment loan, keep the amount borrowed as low as possible by buying a less expensive product (if absolutely needed). Shop around for a loan by comparing at least three potential lenders. Better still, delay the purchase of the product until your financial situation is more secure and you've whittled down most, if not all, of your existing debt.

Follow a debt repayment acceleration plan. One of the most popular free debt reduction programs is Power Pay. Developed by Utah State University Cooperative Extension, PowerPay assumes that you are currently paying at least the required minimum payment to each of your creditors and can continue to pay the same total monthly amount until all of your existing debt balances are down to zero. The program also assumes that no new debts will be added during the duration of the debt repayment plan. If they are, they will not be included in the debt repayment calculation.

To use PowerPay, you'll need to enter the names of your creditors and the outstanding balance, annual percentage rate (APR), and monthly payment on each debt. Once these data are entered, PowerPay users can print out a calendar that shows how much to pay each creditor monthly. When a debt gets paid off, its previous monthly payment is added to the payment sent to a remaining creditor. The analysis shows when each debt will end and the time and interest saved by following the PowerPay program.

Generally, you'll save the most money with PowerPay or any other debt repayment acceleration program by paying off the most expensive debt first. In other words, start by adding extra payment amounts to debts with the highest APRs. This might include credit cards with high penalty interest rates and high-interest rate department store credit cards which often have interest rates in the 21% to 28% range.

If you need assistance with debt repayment, contact a non-profit credit counseling agency. Most credit counseling is done by telephone and secure Web sites these days so driving distance to an agency need not be a problem. Credit counseling agencies can, not only advise you on budgeting, but they can also put you in a debt management plan (DMP). With many DMPs, some or all of your creditors may be willing to accept lower payments and/or reduce interest rates and fees charged.

In summary, if you want to start investing or increase the amount you currently invest, pay off your debt as soon as possible. There are five smart things that people can do to get out of debt: increase income, decrease expenses, avoid new debt, accelerate debt repayment, and reach out for help, if needed. Don't ignore a growing debt problem because it will only get worse. Take action to address the situation today.


  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences