Brian Brandow was making a six–figure salary as an IT project manager in New York when in the summer of 2010 he realized he couldn't afford to take his family of five on vacation.
When he and his wife finally took stock of their debt, they realized they owed $109,000, spread across five credit cards.
"We were living paycheck to paycheck," he says. "We were kind of naïve. We really didn't have a plan and that's what led to overspending for so many years."
Brandow, who now runs a personal finance blog called Debt Discipline, said he and his wife sat down to figure out where their money was going. They found ways to save, his wife went back to work, and they came up with a methodical payment plan. Four years later, they were debt–free.
The Brandow family story isn't unique. Average U.S. household credit card debt totals over $16,000, according to a 2016 NerdWallet survey, with more outstanding for auto loans, home loans, and student loans. If you're ready to take control of your finances, start by honestly assessing your total debts, and create a repayment plan that works for you.
Take stock of your debts
Do you know the current balances of each of your debts? How about the interest rates? If you pay only the minimum balances, how long will it take you to pay everything off? If you're like many consumers, then you can answer these questions in only the vaguest of terms.
"So many Americans are ashamed of their debt and don't want to admit to themselves it's a real problem," says Sean McQuay, credit and banking expert at NerdWallet. "The first step in my mind is to take a break, pause, and think about the debt in front of you."
Experts say it's essential to know how much you owe and the interest rates on each loan, whether that's a credit card, auto loan, mortgage loan, or other debt. Once you have a handle on your balances, creating a realistic payoff strategy will be easier.
"The truth is, for a lot of people, they probably don't know what their interest rate is," says Matt Schulz, senior industry analyst at CreditCards.com. "But it's incredibly important to know so you can draw up a battle plan for how to attack your debt."
Prioritizing debt by interest rate
Paying off debts with the highest interest rates first could save you the most money in the long run, assuming you pay them on time and follow other loan or cardholder agreement rules. Ranking and repaying debts in order from highest to lowest interest rate lets you put more of your payment toward principal, which can help reduce your overall debt.
"With that you're tackling the debt that costs you the most," says McQuay. "If you talk to the majority of CPAs and many financial advisors, they'd recommend you pursue that strategy, because at the end of the day it may save you the most money."
McQuay said he largely used this method when he paid off about $10,000 on a handful of credit cards two years ago. He also took advantage of credit cards with balance transfer promotional offers. Balance transfer offers may include credit cards with low promotional interest rates or even temporary periods of no–interest on the balance transfer amount, allowing consumers who qualify to roll over debt from high–interest credit cards.
"It's not like these cards erase your debt burden," McQuay says. "They simply give you breathing room to pay for that debt."
One aspect of prioritizing by interest rate that you'll want to consider is your need to feel as if you're making headway.
"You'll have less of the instant gratification with [prioritizing by interest rate], just because it may take longer for you to pay off any one particular card," Schulz says. "You may not feel like you're making quite as much progress, even though in reality you may be making significant progress."
Before you apply for a credit card with a balance transfer offer, read the fine print so you understand the terms and conditions. Applicants with the strongest borrowing histories are more likely to qualify for the best balance transfer credit card offers. And no matter what type of credit card you use, always pay your credit card bill on time, since late payment fees will reduce interest savings.
Prioritizing debt by balance
Prioritizing by interest can help save you the most money, but if your highest–interest debt is also your largest debt, paying that off first may not give you the psychological boost you need to keep going. That's because it could take longer to feel like you're making progress, and if you're beginning a long journey to debt freedom, it's crucial to stay motivated, Schulz says.
The debt snowball method can help keep you motivated because it lets you tackle the smallest debts first. Once those are paid off, it frees up more money to roll over into paying off bigger debts.
"You're giving yourself gold stars as you go," says McQuay. "You can feel like you're conquering your debt very early and very quickly. That can provide the momentum you need to really conquer the larger debt amounts later on."
However, you may end up paying more in interest with this method.
For Brandow, who used this approach, having that sense of accomplishment was important.
Although it took 50 months to get rid of all of his debt, Brandow was able to eliminate the first debt, worth about $10,000, relatively quickly.
"We really wanted to have that quick win," he says. "That's really why the snowball method seemed to be the right way to build the momentum and keep us on track."
Prioritizing debt by credit card minimum payment
If cash flow is your problem and you suspect that greater budget flexibility will help you avoid racking up more debt in the future, you can consider focusing on balances that have the highest minimum payment.
For instance, if your largest minimum payment is $270, by paying off that loan first, you are freeing up discretionary income to put toward an emergency savings fund or toward other debt.
The drawback to this method is it may not save you the most in interest payments. It also might not give you the quick payoff win you want to stay motivated. And because minimum payments can change and credit card issuers often utilize complicated formulas, it may be difficult to calculate what payments will be in future months, Schulz says.
Choosing a strategy
"Really, whichever of these techniques works best for you and motivates you to keep pushing you forward is what you should do," Schulz says. "There's not one answer as to which one is best."
Start by keeping track of debts, interest rates, and payments. Brandow said he used a simple Excel spreadsheet, but there are also online programs that can help.
Brandow said the visual representation of watching the debt go down on his spreadsheet helped keep him motivated, but it was also important to focus on the goal. He recognized that at the end of paying off debt they would have a surplus of money to save for things like vacation or to build wealth for retirement.
"The short term sacrifice was really worth it for the long term goal," he says.