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How to control your debt so it doesn’t control you

Debt happens. Credit card balances, medical bills, student loan payments—it all has a way of piling up. If you’ve accumulated debt over the course of the past year, you’re far from alone. Credit-card debt levels in the U.S. spiked to a record high at the end of 2022, according to the most recent data from the Federal Reserve Bank of New York, with other forms of personal debt also reaching new peaks. Post-pandemic spending is one factor. At the same time, it’s become increasingly difficult to pay down debt thanks to high interest rates (including credit card APRs ) and inflated prices on just about everything.

One way to understand the amount of money you owe is to calculate your debt-to-income ratio, or DTI. Start by tallying up all of your monthly payments, including rent/mortgage, auto and student loans and minimum credit card payments. (Don’t include utility or cell phone bills, groceries or health insurance.) Then divide that number by your gross (pre-tax) monthly income. This will give you a percentage; 36 percent or less puts you in the safe debt zone, while a DTI of 43 percent or more indicates that you have too much debt.

Even if your DTI comes in high, it’s not all doom and gloom. Now you have a clear sense of the state of your financial health, so you can turn things around and get your numbers moving in the right direction. Here are the best first steps to take toward controlling your debt so it no longer controls your life—or keeps you up at night.

Request a copy of your credit report.

Just like it was futile to try and hide your report card from your parents, there’s no point trying to avoid facing your credit report. It’s free to get a copy, and it can help you get a clear picture of how much you owe—for instance, reminding you of any debt you’ve forgotten about, like an old credit card. Reviewing your credit report also lets you identify and dispute common errors, like incorrect balances or accounts belonging to someone else with a similar name. Such mistakes are more common than you might think: One in four people find mistakes on their credit reports, according to a Federal Trade Commission report. Note that you have different credit reports from each of the three major credit reporting companies; you can request all of these at once (they may differ slightly) for free once each year.

Pay more than the minimum on your credit card (even if by just a little). 

When you can’t pay off your full balance, it can be easy to say, “Oh well, I’ll just pay the minimum.” But when you do the math you’ll see that upping your payment even by a little bit can have a major impact over time because you’ll pay off your debt sooner and accumulate less in interest. To find a little extra cash you can allot toward your debt, examine your monthly expenses by looking at your card and bank statements, or use Ally Bank's spending buckets to help organize your account. When you realize that you’re paying for at least three streaming services that you haven’t used in a year, you’ll identify spots where you can easily cut back and reallocate money toward chipping away at that credit card bill.

Come up with an actual budget. 

Yeah, it can feel Dad-like but setting parameters on your monthly spending really is the key to finding extra money you can use toward paying down your existing debts—and the key to avoiding racking up more. The ultimate goal: Set and stick to a monthly budget that lets you meet your bills and your needs (and some of your wants) without adding any additional charges to credit cards you’re trying to pay off. Carrying a debit card instead of a credit card is a way to ensure you don’t spend more than you have in your bank account, although obviously you’ll need to pay close attention to your balance so you don’t overdraw your account and incur fees.

Remember this added motivation to pay down your credit card. 

When working on paying off credit card debt, keep in mind that it pays to keep your balance to 30 percent or less of your available credit. That’s because your credit score isn’t based on how much you owe so much as it’s based on what you don’t borrow—the percentage of available credit you’re not using. Called your credit utilization ratio, your credit limit divided by your current balance makes up about 30 percent of your credit score. And having a high credit score means access to auto loans, mortgages and credit cards with more favorable terms in the future.

Look into transferring your credit card balance. 

The worst part of being in credit card debt is watching your interest compound, so you’re paying interest on top of interest. And these days, credit card APRs are at a four-decade high , hovering around 20 percent. If you have a high-interest card, here’s why you should consider making a move: Many credit cards have introductory offers where zero interest is charged for 12 to 21 months. That means you can likely save hundreds or even thousands of dollars in interest by transferring your balance (plus the compound interest you would have paid on that interest). Typically, you’ll need to pay a balance transfer fee of 3 to 4 percent of the balance you transfer. This is usually well worth it if you’re currently paying 18 percent or more in monthly interest and know you can’t pay off your debt in the next couple months. To take the first step in transferring your credit card balance, search for a card with a 0% introductory APR on balance transfers, one that has a high enough credit limit to accommodate the amount you owe and has no annual fees. Keep in mind that these introductory offers generally only apply if you’re changing to a new bank, not applying for a different card from your current bank, and require applicants to have good credit.

Get help if you need it. 

If it’s a struggle to even meet the minimum monthly payment on your credit card anymore, the worst thing you can do is ignore the bill. Instead, call your card issuer and ask what payment relief programs they offer. They may let you skip a payment cycle or help you set up a more manageable payment plan. Being proactive and calling can often help you avoid late fees—which can increase steeply when you miss more than one monthly payment—increased interest (known as a penalty APR) or being reported to credit bureaus or sent to collections, which will negatively impact your credit score and make your financial life even more difficult down the road. Another way to get help is to enlist the help of a credit counselor; the nonprofit National Foundation for Credit Counseling is a great place to start. A certified counselor can offer advice on both the most effective way to pay off your debts and how to budget your income. Credit counseling services are available for low to no cost in most areas, so they won’t compound your debt problems.

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