Six steps toward reducing your debt

Debt-to-income ratio: the percentage of your monthly gross income (your income before taking taxes into account) that goes toward debt payments.
You should try to keep this number below 35%, as many financial institutions will hesitate to provide loans to people with a higher number.

Get help with debt problems
If you're paying bills late and find yourself becoming increasingly concerned about personal debt, consider seeking the services of a trained, certified, nonprofit credit counselor. A counselor can offer free or low-cost guidance on managing your money, working through financial problems and developing a personalized plan to help prevent such problems from happening in the future. The National Foundation for Credit Counseling (NFCC), the nation's largest nonprofit credit counseling network, can put you in touch with one of its nearly 100 Member Agencies in more than 800 offices throughout the US. Call the NFCC at 800 388-2227 or visit for more.

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For most people, becoming 100% debt-free and staying that way is a challenging task. And not all debt is necessarily "bad." For example, a mortgage can provide you with tax advantages and may replace the rent you would otherwise have to pay, while a student loan can lead to a rewarding career and greater financial security down the road. It's really about taking on too much debt (especially the kind that results in high interest rates like many credit cards do) and borrowing more than you can realistically repay.

There are several potential signs that might indicate you have too much debt on your hands. For example, you might be in too deep if your debt-to-income ratio (including your mortgage, a car loan or lease, credit card balances and any other forms of debt you have), exceeds 35% of your gross income. Also, you might be in trouble if you find yourself able to make only minimum payments on credit cards. Other indications of excessive debt: you've reached the available credit limits on your credit cards, or you've recently been denied credit due to legitimate black marks appearing in your credit reports.

Being buried under debt can certainly cause significant cash flow problems and can also affect your financial security well into the future. For example, it can be tough to save enough for retirement and other important goals when so much of your income is going toward paying today's mounting credit card bills. That’s why learning how to manage the debt you have (good or bad) while still being able to save for things like a rainy-day fund, retirement and other long-term goals is a critical part of your overall financial health.

If you're concerned about your debt situation, read on for a handful of steps that could lead you down a path toward healthier, more manageable debt levels.

1. Build a budget
A budget can help you monitor spending, reduce debt and focus on financial goals. You may already have a budget in place, but if you see your debt increasing, now is the time to revisit your current budget to see exactly where you are spending more than you had planned.
Building a budget can also help you become more comfortable with where your money is going. If you know how much of your paycheck will be going toward living expenses and debt each month, you may be more inclined to continue saving for long-term goals such as your retirement fund. But if you are still feeling unsettled in this area, it may be a good idea to seek the advice of a financial planner. This person can help you map out a plan to reach your financial goals, while working through your current debt.

To learn more, read our article on Budgeting basics.

2. Know what you owe
In an effort to reduce your debt, it helps to know exactly what you're facing. Gather all your latest credit card statements, loan papers and your checkbook register. Write down all your debts, the amount you owe on each account, the interest rate being charged and the minimum payment currently due each period. Add up the combined total you owe to creditors to gain a full understanding of how much debt you have. While this might uncover some unpleasant facts, it might also serve as motivation to determine your next steps when it comes to managing your debt.

3. Pay more than the minimum that is due
If you pay just the minimum monthly payment due on a credit card or loan, getting out of high-cost debt might take a very long time, and you could end up paying a lot of interest by the time you pay off what’s owed, if ever. For example, let's say you use a credit card with an 18% interest rate to buy a new sofa at a bargain price of $899. You then make no more than the minimum payment each month on the card, with the minimum payment calculated as interest plus 1% of your remaining balance. It will take you 102 months (8½ years) to pay off the sofa, and you will pay about $772 total interest. Essentially, with the interest added in, you will end up paying $1,671 for a sofa that was priced at $899 when you bought it. (This example assumes that your card has a zero balance when you use it to buy the sofa and you use the card only for that single purchase.)

4. Ask your credit card company for an interest rate break
Consider asking any company that issued you a credit card or loan to reduce your interest rate. Particularly if you're a good customer with a strong credit history, many companies will honor your request rather than risk losing you to the competition. If you're carrying a high balance on a card, being granted an interest rate reduction on that card could save you hundreds or even thousands of dollars in interest charges over time.

If the company seems unlikely to budge, you still have the option of taking action number 5, outlined below.

5. Dip into savings…but only temporarily
If you’re paying higher interest on your debt than you’re earning on savings, consider using at least some of your savings to reduce the debt. You might decide it does not make sense to earn, say, 1% on savings when you’re paying 18% interest on a credit card. Just make sure you keep enough savings in a rainy-day fund to cover six months’ worth of expenses in the event of an emergency, like high medical bills or a temporary loss of income.

6. Make a Plan
Now that you have a good idea of the steps you can take to eliminate your debt (or at least bring it to a manageable level) you’re on your way to improving your financial health. But keep in mind you don’t have to go it alone – when formulating a plan, make sure to involve family members, spouses or partners who are also contributing to your financial goals. It’s important everyone does their part to manage the household budget.

You may also want to consider the help of a financial advisor or the use of online budgeting services (such as, to help you track your spending and offer some ideas on how to find more money to save). These resources can be instrumental in not only helping you reach your goals, but sticking to your plan and making adjustments along the way to account for life’s milestones (such as buying a home or paying for a college education).

Always remember that facing your debt is the first step and it can be the most challenging. But once you’ve committed to a plan, you’ll be able to see the positive results of your efforts.

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