New year, less debt: Our guide to debt management

With a new year comes new aspirations. And with a clean state – and 12 months – ahead of you, you might want to take charge of your finances. According to Statista, the most popular New Year's resolution for 2025 was to "save money," while "cutting back on living expenses" was No. 7 on the list.

If crushing your debt is one of your New Year's resolutions, we're here to help. Let's walk through different debt payoff strategies, debt management plans, and budgeting tactics.

Understanding debt and its impact

As you might imagine, carrying debt – and in particular racking up high-interest debt – can crunch your budget. That's because money that you owe on say, those loans or credit cards, is costing you each month. In turn, it bumps down the amount you can put toward savings.

Your debt can fall into two main camps: "good debt" and "bad debt." Good debt is low-interest debt that you pay back responsibly, and ideally is used to enhance your life, seize opportunities, or help you achieve meaningful goals. For example, taking out a student loan or mortgage to buy a house.

Bad debt, on the other hand, often includes a high interest rate. This comes with short repayment terms that can drag down your credit score without really providing any long-term benefits. For example, racking up a high balance from shopping or splurging on a vacation. While these purchases might be fun, the value is usually short-lived. And you'll be paying interest fees.

To get started with knocking down your debt, write a list of everything you owe. You'll want to include the outstanding balance, interest rate, lender or creditor, and any other notes that might be helpful.

You might want to label each as "good" or "bad" debt. By breaking it down into either category, it can help you get a big-picture look and totality of your debt.

Debt payoff strategies

A debt payoff strategy can help you slay your debt in a steadfast manner. The two most common debt payoff strategies are the snowball method and the avalanche method.

Explore the debt snowball method

The snowball method involves paying off the debt in the order from the smallest to largest amount.

To start, do a grand tally of all your debts. Start with the lowest-total debt on your list. You'll be tackling this one first. Once that debt is paid off, you can allocate the amount that you've been putting toward that debt to the next-smallest one. Then repeat it until all the debts are paid in full.

The main draw of the snowball method is that it gives you a motivational boost and helps you build momentum. You might feel a surge of satisfaction when each of these debts are paid off incrementally. Plus, that momentum can help you stay steadfast with your payoff plan.

If you want the feel-good sense of accomplishment of immediate results, then the debt snowball method might be a good choice for you.

Understand the debt avalanche method

The debt avalanche method involves paying down the debt with the highest interest rate – or the most expensive debt – first. At the same time, you make the minimum payment on all other debts. If you can swing it, you toss any additional funds toward paying down the largest debt. After this debt is paid in full, you move on to the debt with the next-highest interest rate – or the next-largest debt.

The major plus of the debt avalanche method is to minimize the financial impact of high-interest debt. As you continue paying down your debt and more money becomes freed up in your budget, more can be used to wipe out your other debts – thus, the "avalanche effect."

Benefits of a debt management plan

You might've come across the concept of a debt management plan (DMP). This is usually through an agency that specializes in debt management. It might be a nonprofit or for-profit agency.

Here's how it works: credit counselors will sit down with you and help you establish a payment plan. Your credit counselor negotiates with lenders and creditors on your behalf. Usually, fees are dropped and you'll qualify for a lower interest rate. Instead of making debt payments with the lenders and creditors, you make a single payment to the agency or organization.

Debt management plans usually last for about 4 –  5 years. While it can simplify things and help you save money – and reduce stress – the downsides of these programs is that there are setup and ongoing fees, certain debts don't qualify, and you might have limited access to credit.

While DMPs can be a strong choice for you to pay off your debt, you'll want to do your homework and research organizations to make sure they're reputable. Fraud and scams are quite common. Look up reviews.

Advantages of reduced interest rates

As mentioned, a main draw of a DMP is that credit counselors may negotiate on your behalf to lower your rates on high-interest debt. In turn, this can bring down your monthly payments, which helps you make a larger dent in your debt repayment quicker.

The role of debt consolidation in debt management plans

Because debt management plans consolidate high-interest debts into one affordable monthly payment, this simplifies the repayment process for individuals.

Because the credit counselor is responsible for disbursing the payments to creditors on your behalf, it's important to be diligent in researching the credibility of these debt management companies. That way, you can rest assured these payments will be made on your behalf – and that the company is doing their part as promised.

You can explore ratings and reviews of these companies or organizations through the Better Business Bureau or TrustPilot. You can also assess these organizations through the National Foundation for Credit Counseling (NFCC). Member agencies are listed on the NFCC’s website.

Other debt consolidation options

If you'd like to explore debt consolidation options beyond a debt management plan, you might also want to consider debt consolidation personal loans or balance-transfer credit cards.

About debt consolidation personal loans

A personal loan can be used to pay off high-interest debt as a debt consolidation loan. Personal loans are known to be flexible in how they're used. Plus, you can enjoy variable loan terms. For example, your term can be 36 or 60 months with a loan from Rocket Loans^SM.

Because a personal loan is an installment loan, you receive the lump sum up front and make monthly payments until it's paid off, so you can expect predictable payments.

Another perk of a debt consolidation through a personal loan is that you can enjoy lower interest rates, compared to credit cards.

To qualify for a personal loan, you'll need to have the following:

• Steady, consistent income
• Debt-to-income (DTI) ratio that's usually 36% – 43%, with less than 28% of the total debt going toward rent or mortgage payments
• Minimum credit score of 610 – 640
• Origination fees (possibly)
•  Required collateral (possibly, if unsecured)

Personal loans with Rocket Loans are unsecured, and don't require collateral.

How balance-transfer credit cards work

Another option besides a personal loan credit card consolidation is a balance transfer credit card. When you do a balance transfer with a credit card, you can move your debt from an existing card to a one with a promotional 0% interest APR, which you can use for debt consolidation.

The promotional period is usually anywhere from 6 to 21 months. Once the period ends, the standard rate kicks in. This rate could be significantly higher – think 20% or more – and depends on your creditworthiness. (Currently, the average credit card interest rate hovers at 21.39%.)

While this debt payoff strategy can help you save money on interest, you'll want to note there's a balance transfer fee, which is usually 3% – 5% of the amount you're moving to the new card.

It's important to come up with a repayment plan that makes sure you pay off the balance before the promotional period ends. Otherwise, you might find yourself paying far more in interest than you bargained for.

The pros and cons of debt settlement

When you go the debt settlement route, you'll work with your creditors to agree upon a lower amount than what you originally owe for the loan or debt payoff. Once you've landed on an amount, you're on the hook for paying off the balance in full.

You can work with a debt settlement company, which can serve as a go-between for you and creditors. They can work on your behalf to come to an agreement.

Debt settlement may be an opportunity to pay off your debt and start the year fresh. Before you jump in, you'll want to carefully weigh the pros against the cons.

Establishing a budget for debt reduction

Your New Year's financial plan needs to go beyond just debt repayment. Instead, you'll want to focus on establishing a practicable, sustainable budget going forward.

Let's look at some ways you can create a budget and maintain that necessary financial discipline.

Create a budget and track expenses

Without a budget, you don't have a roadmap to steer your ship, so to speak. Having a money management plan gives you the self-awareness to see where your money is going. In turn, it can help you feel empowered to make decisions that benefit you. Creating a budget is the first, essential step toward sound financial management.

To start, list all your monthly expenses and see how they stack up against your income.

It's often helpful to divide your expenses into two main categories: fixed, which are expenses that don’t really change from month to month; and variable, where the amount can change.

You might want to try putting aside a fixed amount for each spending category. That way, you can stay within your means, and put any surplus from your income toward your savings. If you find yourself going over your budget and falling short, you can look for ways to save.

Using a simple spreadsheet can help you keep track of expenses and set financial goals. List every expense and allocate a budgeted amount for each. Be sure to list the expenses on separate lines. For example, instead of clustering all your streaming services, list each one out individually.

You can try a popular budgeting method, such as the 50/30/20 rule. This is where 50% of income is allocated to needs such as housing, transportation; 30% is allocated to wants; and 20% goes toward savings or debt repayment.

Tips for maintaining financial discipline

Using cash for certain types of purchases also can help you be more aware of where your money is going. For example, if you find yourself spending too much on groceries each month, look for ways to save on food. You can make a shopping list when buying groceries, don't shop when you're hungry, and only buy sale items.

Evaluating success and adjusting strategies

A budget is an evolving thing, and as your life changes so will your budget. It's a good idea to review your budget on a regular basis. That way, you can make tweaks along the way.

The importance of monitoring credit reports

Having a good credit score can help you secure a credit card or financing for a house, car, or other important big-ticket purchases with the most favorable terms and interest rates.

You can get a free credit report weekly from each of the three credit bureaus – Experian^®, Equifax^®, and TransUnion^® – at AnnualCreditReport.com. When you regularly check your credit reports and scores, this can help you spot errors and identify any negative (or positive) credit actions and financial habits that might impact your creditworthiness – and credit health at large.

Building an emergency fund while paying off debt

Yes, this is entirely possible. It might feel like spinning plates, but building an emergency fund while paying off debt means you have enough funds set aside in case you lose your job or major source of income, are faced with high medical bills from battling a chronic illness, or have an unexpected expense.

Even stashing away a small amount each month can help you build a savings cushion. If you’re able, consider automating $5 or $10 a week.

The bottom line: Start the new year by taking control of debt

By choosing a reasonable debt payoff strategy and coming up with a realistic plan, you can take your debt repayment by the reins. In turn, it can help you feel more empowered and in control of your finances in the new year.

To help you best manage your debt, consider exploring a debt consolidation personal loan with Rocket Loans.