Credit Cards and Managing Debt · Lesson 2 of 3
Make a Plan to Pay Off Debt
List your debts, compare the avalanche and snowball methods with real numbers, call your creditors for help, and find debt help you can trust.
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Parts of this lesson are not translated into your language yet, so they are shown in English.
In this lesson
What you will learn
- List every debt with its balance, interest rate, and minimum payment.
- Compare the avalanche (highest rate first) and snowball (smallest balance first) methods using real numbers.
- Ask a creditor for a hardship plan, a lower rate, or a new due date.
- Tell nonprofit credit counseling apart from risky debt settlement and paid student loan help.
How this connects to class: In class you learned two ways to reduce debt and where to get help. This lesson works through both methods with the same three debts. It adds a script for calling creditors, a checklist for choosing debt help, and what changed for federal student loans.
Words to know
- Avalanche method
- Paying extra on the debt with the highest interest rate first, and the minimum on the others. It usually costs the least interest.
- Snowball method
- Paying extra on the smallest debt first, and the minimum on the others. You finish one debt sooner, which can help you keep going.
- Hardship plan
- A short-term agreement with a lender that may lower your payment, interest rate, or fees when you have a money problem, such as lost work or illness.
- Credit counseling
- Help from a trained counselor who reviews your budget and debts with you. Many nonprofit agencies offer it for free or a low fee.
- Debt management plan
- A plan set up by a credit counseling agency. You make one monthly payment to the agency, and it pays your creditors, often at lower interest rates.
- Debt settlement
- When a company tries to get your creditors to accept less than you owe. It is risky: it can add fees, hurt your credit, and lead to lawsuits.
- Loan servicer
- The company that sends your student loan bills, takes your payments, and helps you change your repayment plan. Its help is free.
- FSA ID
- The username and password you use to log in to StudentAid.gov. Never share it with anyone.
Step 1: Make your debt list
You need to see all your debts in one place before you can make a plan. Get your latest statements, or log in to each account. Write down four things for each debt.
- The name of the debt, such as "store card" or "car loan."
- The balance: how much you owe today.
- The interest rate (APR).
- The minimum monthly payment and the due date.
Include everything: credit cards, store cards, personal loans, "buy now, pay later" plans, medical bills, payday or car title loans, and money you owe family. For any bill that is past due, write how many days late it is. Your credit report can show debts you forgot. See Read Your Credit Report and Fix Mistakes.
Next, look at your spending plan. Pay for needs such as rent, food, and utilities first. Then choose one amount you can pay toward debt every month. Paying more than the minimums is what makes a payoff plan work. See Build a Spending Plan That Fits Your Real Life.
Example
Tesfaye's debts: $6,000 and $300 a month
Tesfaye works as a home health aide in Alexandria. After rent and other needs, he can pay $300 a month toward debt. His minimum payments add up to $200.
| Debt | Balance | APR | Minimum payment |
|---|---|---|---|
| Store card | $500 | 25% | $25 |
| Credit card | $3,500 | 27% | $105 |
| Credit union loan | $2,000 | 11% | $70 |
| Total | $6,000 | $200 |
$300 a month − $200 in minimum payments = $100 extra each month
Tesfaye pays every minimum on time. He puts the extra $100 on one "target" debt. When a debt is paid off, he adds its payment to the next target. He stops using the cards while he pays them off. There are two common ways to choose the target.
- Avalanche: the highest interest rate first. His order is the credit card (27%), then the store card (25%), then the loan (11%).
- Snowball: the smallest balance first. His order is the store card ($500), then the loan ($2,000), then the credit card ($3,500).
Example
Avalanche or snowball: same $300, two results
| Method | First debt paid off | All debts paid off | Total interest |
|---|---|---|---|
| Minimum payments only ($200 a month) | month 27 | month 63 | $3,525 |
| Snowball ($300 a month) | month 5 | month 26 | $1,680 |
| Avalanche ($300 a month) | month 22 | month 25 | $1,416 |
| Avalanche compared with snowball | 1 month sooner | $264 less |
Both plans cost far less than paying only the minimums. They save Tesfaye more than $1,800 in interest and more than 3 years. The avalanche saves the most money. The snowball pays off the store card in month 5, and that early win may help him keep going. The best method is the one you will follow every month.
These numbers assume the minimum payments stay the same and interest is added once a month. Your real numbers will be a little different.
Call your creditors before you miss a payment
Many lenders have hardship programs, but they may not advertise them. Call as soon as you know you will have trouble paying. It is easier to get help before you miss a payment.
- Your account number
- Why your income dropped or your costs went up, such as fewer hours or an illness
- An amount you can really pay each month, from your spending plan
- Paper and a pen to write down names, dates, and what was agreed
"Hello, my name is [your name]. My account number is [number]. My income dropped because [reason]. I want to keep paying you. Can I pay [amount] a month for [number] months?
Do you have a hardship program? Can you lower my interest rate or waive late fees? Can you move my due date to [date], after I get paid?
Will this plan be reported to the credit bureaus? What happens to my card during the plan? Please send me the terms in writing. May I have your name and a reference number for this call?"
Do not agree to a payment you cannot make. Some hardship plans close or freeze the card, so ask before you agree.
Nonprofit credit counseling and debt management plans
A credit counselor reviews your income, spending, and debts, and helps you make a plan. Many nonprofit agencies offer a first session for free or for a low fee, in person, by phone, or online. Some offer help in Spanish and other languages.
If it fits your situation, the counselor may suggest a debt management plan. You send one payment each month to the agency, and the agency pays your creditors. Creditors may agree to lower your interest rates or waive some fees. These plans often take four years or more, and you may need to close your credit cards.
A nonprofit is not always free, and it is not always honest. Before you sign up, check these things.
- Ask for every fee in writing.
- Ask if the counselors are certified.
- Check the license. In Maryland, debt management companies must have a license from the Office of Financial Regulation. In Virginia, credit counseling agencies are licensed by the State Corporation Commission's Bureau of Financial Institutions.
- Look for complaints with your attorney general. In DC, contact the Office of the Attorney General.
- Make sure the plan fits your budget. Keep paying your bills until each creditor has accepted the plan.
Watch out
Debt settlement and "debt relief" traps
Debt settlement companies promise to get your creditors to accept less than you owe. Many tell you to stop paying your creditors and put money into a special account instead. While you wait, late fees and interest grow, your credit score drops, and creditors can sue you. Many people quit before the program ends.
- It is illegal for debt relief companies that sell by phone to charge you before they settle or reduce at least one of your debts.
- Be careful with any company that tells you to stop paying or stop talking to your creditors.
- No one can promise to stop all lawsuits or to erase all your debt.
- Be careful with claims about a "new government program" for credit card debt.
If a creditor forgives part of a debt, the IRS generally counts the forgiven amount as income. You may get a Form 1099-C. Some people qualify for an exception, for example if they owed more than they owned. A free VITA tax site can help. See File for Free and Claim the Credits You Earned.
Federal student loans: use the free official help
A federal law passed in July 2025 changed how federal student loans are repaid. Key changes began on July 1, 2026, and the SAVE repayment plan is ending. More rules and deadlines are still being announced.
You never have to pay anyone for help with federal student loans. Log in at StudentAid.gov or call your loan servicer. Both are free. Never share your FSA ID, which is the username and password for StudentAid.gov. Scammers use it to take control of your account.
Private student loans are different. They come from banks and other lenders. Call your lender and ask what hardship options it has.
Tip
Stop the debt from growing
While you pay down debt, try not to add new debt. Keep a small emergency fund, even a few hundred dollars, so you do not have to put a surprise bill on a card. See Start an Emergency Fund from Zero. Stay away from payday and car title loans; see The Real Price of a Loan. Write your payoff date on your calendar, and mark each debt you finish.
Key takeaways
- Start with a full list of your debts and one monthly amount you can pay toward them.
- Avalanche saves the most interest. Snowball pays off a first debt sooner. The best method is the one you will follow.
- Call creditors before you miss a payment and ask about hardship programs. Get every agreement in writing.
- Never pay a debt relief company before it settles a debt, and never stop paying because a company tells you to.
- Help with federal student loans is free at StudentAid.gov and from your loan servicer.
Check your understanding
Answer the questions, then select Check my answers. Get 4 of 5 right to complete this lesson. This is practice: there is no time limit, and we do not keep your answers.
Go further
Trusted websites where you can learn more. These links go to other websites that Dollar Scholars does not run.
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How To Get Out of Debt (another website)
How to choose a credit counselor, how debt management plans work, and the risks of debt settlement.
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Cómo salir de las deudas (another website)
The same guide in Spanish: credit counseling, repayment plans, and the risks of debt settlement.
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Find a nonprofit credit counselor (another website)
A national network of nonprofit credit counseling agencies. Help is offered by phone, online, and in Spanish.
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Spotting student loan scams (another website)
Why you should never pay an upfront fee or share your FSA ID, and how to manage loans for free.
This lesson is general financial education, not legal, tax, or financial advice. Rules and amounts change, so check important numbers with an official source.