Debt payoff plan

What It Means

A debt payoff plan is a written list of everything you owe, with each debt's balance, interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more and minimum payment, plus the order you'll pay them off in and how much extra you'll put toward them each month. Every debt keeps getting its minimum, and the extra goes to one target at a time. When that debt is gone, its payment moves to the next one on the list. The plan's end point is your debt-free dateDebt-free dateThe month your last debt is scheduled to reach a zero balance, based on the balances, interest rates and payments you plan to keep making. See more.

How People Say It

• "Our plan is the car loan last, everything else first."
• "I wrote every balance and rate on one page."
• "When the store card's gone, that $175 goes to the Visa."

The Breakdown

How to build one

1. List every debt with its balance, APR, minimum payment and due date. Your statements have all four.
2. Add up the minimums, then find how much more your budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more can send each month.
3. Choose an order: highest interest rate first, or smallest balance first.
4. Work out the debt-free date for that order and write it on the plan.
5. Each month, pay every minimum, send the extra to the target, and roll a finished debt's payment onto the next.

Worked example. The household in the tool owes $13,100 across three debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more, with minimums of $365 and $150 extra, for $515 a month. Buhata's month-by-month estimate:

What the result means. The $150 extra does most of the work here, cutting 47 months and more than $2,800 of interest from the minimums-only path. The order matters less: the two methods finish in the same month, and highest rate first saves about $44. Smallest balance first clears the store cardStore credit cardA credit card offered by a retailer, either usable only at that store or co-branded with a card network, often with store discounts and a higher APR. See more in month 4, which some people find easier to stick with.

Try it today. Write down every debt from your statements, even the small ones, before choosing anything else.

Good to Know

The Consumer Financial Protection Bureau describes the same two orders: paying the highest interest rate first to save the most money, or paying the smallest balance first for faster progress, while making the minimum payment on everything else. Its Your Money, Your Goals toolkit has a debt action plan and a reducing debt worksheet for writing the plan down. If the minimums alone don't fit, the Federal Trade Commission suggests contacting your creditors, since some may lower the minimum payment, waive certain fees, reduce the rate or move the due date.

Related Terms and Categories

• Debt snowball

  A way to pay off debts where you pay the minimum on all of them and put every extra dollar toward the smallest balance first.

• Debt-free date

  The month your last debt is scheduled to reach a zero balance, based on the balances, interest rates and payments you plan to keep making.

• Extra payment

  Money paid toward a loan on top of the required payment, usually to lower the principal sooner, which cuts the interest and can shorten the loan.

• Debt consolidation

  Rolling several debts into one new loan or card balance, usually to get a single payment and, ideally, a lower interest rate.

Debt and credit