Paying back your debt

1. What Is a Budget?

A budget is a simple plan that helps you manage your money. It shows how much money you earn, spend, and save. Creating a budget is an important first step if you want to get out of debt. It helps you understand where your money is going, what you owe, and how you can adjust your spending to pay off debt faster.

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2. Why Budgeting Matters for Debt Repayment

When you have a budget, you can:

• List all your debts clearly
• Balance your income with spending and savings
• Focus on paying off debts before unnecessary spending
• Track your progress over time

You can use tools like a Budget Planner to help build your budget.

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3. Identify and Understand Your Debts

Knowing exactly what you owe is key to getting out of debt. Make a list of all your debts. This could include:

• Loans (personal, car, payday, student, or mortgage)
• Credit lines (personal, student, or home equity)
• Credit cards
• Other unpaid bills (utilities, property taxes, child or spousal support)

For each debt, write down:

• The total amount you owe
• The minimum payment due each month
• The interest rate

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4. Check Your Credit Report

Your credit report lists all your debts. Reviewing it can help you spot anything you missed or fix any errors. You can get a free copy online from major credit bureaus.

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5. Compare Your Income and Expenses

Use your budget to compare how much money you make each month to how much you spend. This helps you figure out how much you can afford to pay toward your debts. If your expenses are more than your income, take action right away—cut costs where you can and look for ways to boost your income.

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6. Cut Back on Spending

Reducing your spending gives you more money to pay off debt. Review your expenses and look for areas where you can save, like dining out, subscriptions, or unnecessary purchases.

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7. Pick a Debt Repayment Strategy

Having a clear plan makes paying off debt easier and less stressful. Choose a payment schedule that fits your budget and keeps you on track. Be realistic—if payments are too high, you may miss them and hurt your credit.

• Shorter plans mean higher monthly payments but lower overall interest.
• Longer plans lower your monthly payment but increase the total interest paid over time.

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8. Choose Which Debts to Pay First

You can pick between two main strategies:

• Highest interest first: This saves the most money in the long run.
• Lowest balance first: This can help you stay motivated by paying off small debts quickly.

No matter which you choose, always make the minimum payment on all debts.

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9. Deal With Past Due Accounts

If you’ve missed payments, your accounts may be “past due.” These should be paid off as soon as possible to avoid more fees, damage to your credit score, or having your debt sent to collections.

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10. Talk to Your Creditors

If you’re struggling, contact the people or companies you owe. They may be able to:

• Lower your interest rate
• Extend your payment timeline
• Combine your debts into one loan (called debt consolidation)

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11. Manage Personal Debts to Family or Friends

If you owe money to someone close to you, talk to them and set up a clear payment plan. Put it in writing and consider setting up automatic payments. This shows you’re serious about paying them back.

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12. Closing Accounts After Paying Off Debt

Once you pay off a loan or credit card, consider closing the account—unless it’s one you’ve had a long time. Keeping older accounts open helps maintain your credit history and can improve your credit score.