A car loan, a mortgage, student loans, credit cards. It might feel like a dark debt cloud is looming over you sometimes. If you carry some debt on your personal balance sheet, you’re not alone.
Total household debt in the U.S. rose to $17.69 trillion in the first quarter of 2024, according to the latest statistics from the Federal Reserve Bank of New York.That includes everything from mortgages to credit cards to student loans. We’re a heavily indebted nation, and for some, it may take a psychological toll. If that’s you, here’s the comforting news: There are some tried-and-true strategies for paying back outstanding debt.
What Is Considered Outstanding Debt?
Outstanding debt refers to any balance on a debt that has yet to be paid in full. It is money that is owed to a bank or other creditor.
When calculating debt that’s outstanding, you simply add all debt balances together. This could include credit cards, student loans, mortgage loans, payday loans, personal loans, home equity lines of credit, auto loans, and others. You should be able to find outstanding balance information on your statements.
How to Find Outstanding Debt
When paying off outstanding debt, you first might need to track it all down.
As you move throughout the debt payoff journey, you may find it helpful to start a file for your statements and correspondence. Also, you could create a list or input information into a spreadsheet. Organizing your information is necessary for building a debt payoff strategy.
It can be a good idea to build a list of all debts with the most useful information, such as the outstanding balance, the interest rate, the monthly payment, the type of debt, and the creditor. If you have an installment loan, such as a personal loan, the principal amount of the loan is another helpful piece of information.
What if I Can’t Find All My Outstanding Debts?
If you feel as though you’ve lost track of some debts, you may want to start by requesting a credit report from at least one of the three major reporting agencies, Experian®, TransUnion®, or Equifax®. You are legally entitled to one free copy of your credit report from each of the three agencies per week. It’s easy to request a credit report from AnnualCreditReport.com.
A credit report includes information about each account that has been reported to that particular agency, including the name of the creditor and the outstanding debt balance.
It is possible that some outstanding debts may have been sold to a collection agency. The name of the original creditor may be included on the credit report. If that is not the case, you may need to investigate further.
Some outstanding debts may not appear on a credit report. Creditors are not required to report to the agencies, but most major creditors do. That said, a creditor could choose to report to none, one, two, or all three of the agencies. If you’re in information-collecting mode, you may want to consider requesting reports from more than one agency, or all three.
Outstanding Debt Amounts
Aside from how a debt is structured — revolving or installment debt — it can also be thought of as “good” debt or “bad” debt.
Generally, if borrowing money (and thus incurring debt) enhances your net worth, it’s considered good debt. A mortgage is one example of this. Even though you might incur debt to purchase a home, the value of the home will likely increase. As it does, and as you pay down the mortgage balance, your net worth has the potential to increase.
Bad debt, on the other hand, is debt taken on to purchase something that will depreciate, or lose value, over time. Going into debt to purchase consumer goods, such as cars or clothing, will not enhance your net worth.
Each person has a unique financial situation, level of comfort with debt, and ability to repay debt. What one person may be able to justify may be completely unacceptable to another.
How Does an Outstanding Debt Impact Your Credit
One thing lenders may consider during loan processing is the applicant’s debt-to-income ratio (DTI), which compares how much you owe each month to how much you earn. Lenders will often look at this number to determine their potential risk of lending. Different lenders have different stipulations about this ratio, so asking a potential lender about theirs is a good idea.
Calculating DTI is done by dividing monthly debt payments by gross monthly income.
• Monthly debt payments can include rent or mortgage payment, homeowners association fee, car payment, student loan payment, and other monthly payments. (Typically, monthly expenses such as utilities, food, or auto expenses other than a car loan payment are not included in this calculation.)
• Gross income is the amount of money you earn before taxes and other deductions are taken out of your paycheck.
Someone with monthly debt payments of $1,000 and a gross monthly income of $4,000 would have a DTI of 25% ($1,000 divided by $4,000 is 25%).
Generally, a DTI of 35% or less is considered a healthy balance of debt to income.
Should I Pay Down Outstanding Debt?
Barring extenuating circumstances, it’s a good idea to make regular, consistent payments on your debt. Whether or not you decide to pay the debt back on an expedited schedule is up to you.
Some may not feel the need to aggressively tackle their outstanding debt. They may be just fine to continue paying off a balance until the loan’s maturity date. This may apply to people with manageable debt payments, those who have debts with lower interest rates, or those focusing on other financial goals.
For example, someone with a low-interest-rate mortgage loan may not feel the need to pay it down faster than the agreed-upon schedule. So they continue to make regular, scheduled payments that make up a manageable percentage of their monthly budget. Therefore, they are able to work on other financial goals in tandem, such as saving for retirement or starting a fund for a child’s college.
Other scenarios may call for a more aggressive strategy to pay down debt. Some reasons to consider an expedited plan:
• Your debt levels, and therefore monthly payments, feel unmanageable.
• You’re carrying debts with higher interest rates, like credit cards.
• You want to avoid missed payments and added fees.
• You simply want to have zero debt.
You’ll also want to keep in mind that carrying a large debt load could negatively affect your credit. One factor in a credit score calculation is the ratio between outstanding debt balances and available credit on revolving debt, like a credit card — the credit utilization rate.
Using no more than 30% of your available credit is recommended. So, if a person has a $5,000 credit limit on a card, that would mean using no more than $1,500 at any given time throughout the month. Using more could result in a ding on their credit score.
Carrying debt also means paying interest. While some interest may not be avoidable, it’s generally a sound financial strategy to pay as little in interest as possible.
Credit cards tend to have some of the highest interest rates on unsecured debt. The average interest rate on a credit card is 27.65%, as of June 6, 2024. With high rates, it’s worth seriously considering paring back debt balances.
Outstanding Debt Management Strategies
The next step is to pick a debt reduction plan.
Two popular strategies for paying off debt are called the debt snowball and the debt avalanche. Both ask that you isolate one source of debt to focus on first.
Simply put, you’ll make extra payments or payments larger than the minimum monthly payment on that debt until the outstanding balance is eliminated. You’ll continue making the minimum monthly payment on all your other debts.
Debt Snowball
A debt snowball payoff plan involves listing all of your debt in order of size, from smallest to largest, ignoring interest rate. You then put extra funds towards the debt with the smallest balance, while making the minimum required payments on the rest. Once that debt is paid off, you put extra money towards the next-smallest debt, and so on.
The idea here is that there’s a psychological boost when a card is paid off, so it makes sense to go after the smallest first. That way, when a person works up to the card with the next highest balance, they can focus singularly on it, without a bunch of annoying, smaller payments getting in the way of the ultimate goal.
It’s called a snowball because the strategy starts small, gaining momentum as it goes.
Debt Avalanche
Alternatively, the debt avalanche method starts by listing debt in order of interest rate, from highest to lowest. You then put extra money towards the debt with the highest interest rate. Because this source of debt costs the most to maintain, it is a natural place to focus. Once that debt is paid off, you focus your extra payments towards the debt with the next-highest interest rate.
The debt avalanche is the debt payoff strategy of choice for those who prefer to look at things from a purely mathematical standpoint. For example, if a person has one credit card with a 27% annual percentage rate (APR) and another with a 22% APR, they’d focus on that 27% card with any extra payments, no matter the balance.
Of course, it is also possible to modify these strategies to suit personal preferences and needs. For example, if one source of debt has a prepayment penalty, maybe it drops to the bottom of the list. If there’s a particular credit card you tend to overspend with, perhaps that’s a good one to focus on.
Outstanding Debt Payoff Methods
Once you decide on a strategy, whether it’s one discussed above or something that works better for your financial situation, you’ll need to figure out where the money will come from to pay down outstanding debt.
A good first step is to simply list your monthly income and expenses. If you find that you have enough money to begin making extra payments toward your outstanding debt balances, then you might choose to start right away.
Some people choose to keep a 30-day spending diary to get a clear picture of what they spend their money on. This can be a good way to pinpoint areas you might be able to cut back on to have more money to apply to outstanding debt.
If your existing budget is already tight and won’t accommodate extra payments, you might consider looking for some other financial strategies.
Increasing Income
Sometimes the answer is just to make more money. That could mean getting a part-time job or selling things you no longer need or want. You might also think about asking for a pay raise at your regular job.
Using Personal Savings
Tapping into money you’ve saved can be another way to pay down outstanding debt. Savings account interest rates, even high-yield savings accounts, generally pay much less interest than you’re paying on your outstanding debts. Keeping enough money in a savings account as an emergency fund is recommended, but if you have a surplus in your personal savings, putting that money toward your debt balances is a good way to make headway on outstanding debt.
Consolidating With a Credit Card
Using a credit card to pay off debt may seem like an unwise choice, but it can make sense in some situations. If your credit score is healthy enough to qualify for a credit card with a zero- or low-interest promotional rate, you might consider transferring a higher-rate balance to a card like this.
The benefit of this strategy is having a lower interest rate during the promotional period, potentially resulting in savings on the overall debt.
There are some drawbacks to transferring a balance in this way though. One is that promotional periods are limited, and if you don’t pay the balance in full during this period, the remaining debt will revert to the card’s regular rate. Also, it’s typical for a promotional-rate card to charge a balance transfer fee, which can range from 3% to 5%, or more, of the balance transferred. This fee will increase the amount you will have to repay.
Consolidating With a Personal Loan
Using one new loan to pay off multiple outstanding debt balances is another debt payoff method. A personal loan with a lower overall rate of interest and a straightforward repayment plan can be a good way to do this.
In addition to one fixed monthly payment, a personal loan provides another benefit — the balance cannot easily be increased, as with a credit card. It’s easy to swipe a credit card for an additional purchase, potentially undoing the progress you’ve made on your debt repayment plan.
To consolidate your outstanding debt with a personal loan, you might want to look around at different lenders to get a sense of what interest rates they might offer for you. Typically, lenders will provide a few options, including loans of different lengths.
The Takeaway
Outstanding debt can be a heavy burden. Many people owe large amounts of debt, but don’t know how to start making a dent in their balances. A good place to begin is by identifying your current income and expenses to see your overall financial picture. From there, you may decide to focus on paying down certain debts over others. You can then choose the best paydown method for your financial situation.
Ready to kick-start your debt payoff strategy? With low fixed interest rates on loans of $5K to $100K, a SoFi Personal Loan for credit card debt could substantially decrease your monthly bills.
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