Three Strategies for Paying Off High-Interest Debt
Debt is a common reality for many Americans, but it doesn’t have to dictate your financial future. With planning and effective strategies, you can take control of your debt and pave the way for financial wellness. First, let’s talk about an important factor in determining your financial standing: credit utilization ratio.
What Is Your Credit Utilization Ratio and Why Is It Important?
A credit utilization ratio is the percentage of what you owe on your credit card — the outstanding balance — compared to your total available credit limit. The ratio is calculated by dividing the outstanding credit card balance by the total available credit limit.
For example, if the outstanding balance is $1,000 with a total credit limit of $5,000, the credit utilization ratio would be:
$1,000 ÷ $5,000 = 0.20, so that’s a 20% credit utilization ratio.
This ratio is a crucial factor in determining credit score, and the goal is to have a lower percentage. Keeping the credit utilization ratio below 30% is generally recommended for a healthy credit score.
With a lower credit utilization ratio in mind, here are a few strategies to help you achieve that.
Debt Management Strategies
Taking control of your finances begins with a well-structured plan. By crafting an actionable strategy for debt reduction, you can lay the groundwork for improved financial well-being.
- Establish Spending Goals: The first step in managing your debt is setting clear, achievable goals for spending. Begin by reviewing your debts to determine how much money you can use to pay them off. For example:
- Choose Your Payoff Strategy: While there are many ways to pay off debt effectively, financial experts recommend two common methods:
- Consider Debt Consolidation1: If you’re juggling multiple sources of high-interest debt, consider consolidating your debts into a single, more manageable payment. Debt consolidation can streamline your financial obligations and may reduce your overall interest costs.
You have an outstanding balance of $3,500 and a total credit limit of $5,000, so your credit utilization is 70% ($3,500 ÷ $5,000 = 0.70 or 70%). You’ve set a goal to get below 30% credit utilization, meaning you need to pay off at least $2,000 to get your balance down to at least $1,500 ($5,000 x 0.30).
By setting clear spending goals, you get a practical look at your day-to-day spending to see where you can make cuts to help pay off your debt quickly. For help setting a budget, consider using the 50/30/20 budget method to begin.
Debt snowball: Start by listing your debts from smallest to largest amount. Pay the minimums on all the bills but the smallest — make additional payments to the smallest debt. Once it’s paid off, move on to the next-smallest and repeat.
Why a debt snowball is helpful: Watching your debts disappear, one by one, can be a powerful motivator. Each small victory can fuel your determination to keep going, creating a snowball effect.
Debt avalanche: Create a list of your debts from highest to lowest interest rate. Pay off the highest-interest-rate debt first while making minimum payments on all other debts.
Why a debt avalanche is helpful: By prioritizing your most expensive loans, this method can help you save money in the long run by reducing the amount of interest you pay over time.
Through proactive debt management — including on-time payments, paying more than the minimum due and maintaining open communication with lenders — you can take control of your financial well-being, one step at a time.
KeyBank can help you get started in as little as 5 – 10 minutes with a Key Financial Wellness Review.
