#2Stop giving so much to credit card companies.

Paying off your debt will make it much easier to reach your savings goals. Just think—if you no longer have monthly interest payments, that’s money you can start saving. This advice goes for any high-interest debt, such as credit cards or car payments, where interest can’t be deducted from your income before taxes.

How to pay off debt

  • Stop using your credit cards, which will help slow down the growth of your debt.
  • Create a budget to identify nonessential expenses that you can cut back on so you can free up money to pay down balances.
  • Make the minimum payment on all balances, and pay more than the minimum on the balance with the highest interest rate.
  • Try negotiating with credit card companies for a lower interest rate that preserves your credit rating.
  • Consider paying off your debt with a home equity loan. The interest rate is effectively lower because interest payments could be deducted from your income and the loan is secured.1
Increasing payments makes a big difference.
Monthly payment Card paid off in Interest you pay
$120 6 years $2,689
$300 2 years $800
You save $1,889

Here’s what you can save by increasing your monthly payment on a credit card with a $6,000 balance charging 13% interest (if you don’t incur any more charges). In two years, you’re all paid off, and the money that’s been going to pay your debt can start going to your savings.2

Make it happen.

Have questions?

How much debt is too much?

An industry rule of thumb suggests that:

  • No more than 28% of your pre-tax household income should go to servicing home debt (principal, interest, taxes, and insurance).
  • No more than 36% of your pre-tax income should go to all debt: your home debt plus credit card debt and auto loans.
  • As a general rule, try not to borrow money or use your credit cards for things that depreciate in value as you use them, such as cars, washing machines, or vacations.

Should student loans be a payoff priority, too?

While it’s great to be rid of student loans, they’re generally low-interest and don’t appear as a negative mark on your credit rating as long as you never miss a payment. So you don’t need to rush to pay them off.

In financial terms, student loans are often considered “good debt,” similar to a mortgage (and unlike credit cards). Just make regular, on-time payments while you get the rest of your financial house in order. However, timing is crucial: A late payment will be a ding on your credit rating.

How do I create a credit card payoff plan?

  • First, decide which cards to pay off first.
    It makes sense to pay off the highest-rate cards first, so make sure you understand the terms for each of your cards. You might also see if it’s possible to consolidate one or more balances onto another, lower-rate card. Card companies routinely offer the chance to transfer balances, sometimes with very low teaser rates, which could result in real savings in terms of your total interest expense and could accelerate your progress in getting debt-free. (If you do a balance transfer, take note of any fees that might be imposed.)
  • Commit to a payoff schedule.
    Now you can start to pay off your card debt in earnest—and efficiently. Say you had $600 a month for paying credit card debt on three cards. Pay the minimum payments for the two lower-rate cards and apply the rest to the highest-rate card. When that one’s paid off, move to the next-highest-rate card. Our credit card payoff calculator will tell you how many months it will take to pay down your debts.
  • Never be late.
    Make sure you always pay at least the minimum—and pay on time. Credit card companies can impose substantial fees on late payments, and you could damage your credit rating.

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