How to Avoid Debt

1. Build an Emergency Fund

A top way to avoid debt is to have an emergency fund you can rely on to cover unexpected expenses. When you have cash stored away, you won't need to use a credit card or loan to cover a surprise car repair, home repair or medical bill.

Experts recommend saving three to six months' worth of basic expenses in your emergency fund. If that's not feasible, it's also OK to start with a smaller, more manageable savings goal. Having $500 saved can make a difference, especially if it helps you avoid larger financial issues. For example, if you blow out a tire, you'll have the $200 or so you need to replace it. You'll be back on the road while avoiding high-interest credit card debt.

Your best bet is to keep your emergency savings in a high-yield savings account so you can take advantage of high interest rates while having immediate access to your money.

2. Set a Budget You'll Stick To

It's clear that limiting spending helps you avoid debt, but it can be intimidating to commit to a budget. That's especially true if budgeting hasn't gone well in the past. To take some of the pressure off, think of budgeting as a way to categorize your expenses and consciously choose how much of your income you'll spend on each. You can put a lot of effort into this process or a little; it's completely dependent on your personality and your goals. Here are a few types of budgets to try:

• 50/30/20 budget: If you're new to budgeting or want a fresh start, consider the 50/30/20 budget. You'll aim to spend a maximum of 50% of your income on needs, 30% on wants and 20% on saving and debt repayment combined. It doesn't require a lot of initial work or upkeep, and it encourages simultaneous buildup of your emergency fund while paying down any debt you already have.
• Zero-based budget: A more detailed budgeting method is the zero-based budget, where you assign every dollar you earn to an expense category until you reach zero. It can be very effective if you aim to save or stay out of debt. But it will also mean setting up a lot of expense categories and recalibrating every time those categories change.
• No-budget budget: On the other hand, you could decide to skip closely tracking all expenses and go with the "no-budget" budget. Similar to the pay-yourself-first plan, you'll set aside a certain amount for the absolute necessities, like housing, groceries, transportation, utility bills, savings and debt repayment, then spend what's left however you wish.

Learn more: How to Make a Budget

3. Save Automatically

No matter what budget type you choose, make sure to include an automatic transfer to savings to beef up your emergency fund and other savings goals. Set up an automatic savings plan by determining how much you want to save per month for each goal, then making a recurring transfer from checking to savings. Even better, ask your employer to split your paycheck into your checking and savings accounts so you can save immediately upon getting paid.

4. Keep Track of Your Bills

Set up calendar alerts and bill reminders to pay credit card and loan bills on time, or set up autopay. When you miss payments, you risk paying late fees and penalty interest rates. Your credit scores can also suffer, which means more difficulty qualifying for the lowest rates on credit products in the future—and paying more to take on debt.

5. Pay Your Credit Card Bill in Full Each Month

Paying your credit card bill in full every month not only helps you avoid debt, but it can also protect your credit scores and save you money on interest. You can always make multiple payments throughout the month if you're averse to making one big payment when it's due. Multiple payments can also benefit your credit scores, since your balance will be lower when the credit card issuer reports it to the credit bureaus.

6. Only Borrow What You Need

When you seek a car loan, mortgage, student loan or personal loan, opt for the smallest loan possible. That may mean waiting longer and saving up so you can make a bigger down payment on a car or mortgage, which will also lower your ongoing monthly payment.

Student loans should be considered a last resort to pay for college after you've exhausted federal, state and school grants; private scholarships; and work-study funds. Look into tuition-free or low-cost community college programs in your state, and contact your state higher education agency if you're not sure what's available. Fill out the Free Application for Federal Student Aid (FAFSA) for access to federal and state grants and, if necessary, low-cost federal student loans.

7. Maintain Good Credit Scores

Debt may be impossible to avoid if you'd like to buy a house, go to college or buy a car. But you can often get access to a lower interest rate, and lower monthly payments, with a FICO^® Score^Θ of 670 or above (federal student loans are an exception since their rates are set). Many classic debt-avoidance practices also have the potential to improve your credit scores, like keeping debt balances low, paying all bills on time and limiting the amount of new credit you apply for.

8. Use Caution With Buy Now, Pay Later (BNPL) Plans

Buy now, pay later (BNPL) is a type of installment loan that lets you pay off a purchase in smaller, fixed payments over time. You may see this option offered by brands like Affirm, Afterpay and Klarna at checkout when shopping online. While BNPL plans may offer 0% interest (depending on the provider) and have less stringent approval requirements than credit cards, they're not always a slam-dunk option.

That's because BNPL plans open up avenues for potentially sinking into debt. Each BNPL purchase comes with its own agreement, making it crucial to keep track of multiple new due dates if you already have other BNPL purchases, loans or credit cards to pay off. You may also be tempted to spend more than you would have without the option to buy now and pay later, setting you up for more debt.

9. Avoid Lifestyle Creep

It's natural to view a raise or a higher salary when you change jobs as an invitation to spend more. While some lifestyle creep is normal, keep it in check by automatically increasing your savings every time your income goes up. You can allocate extra earnings across your emergency fund, outstanding debt balances, retirement fund and other savings goals before spending the rest however you choose.

How to Pay Off Debt

If you do find yourself in debt, take these steps:

1. Check your credit report. Before making a plan to pay down debt, understand just how much you owe by checking your credit reports from all three credit bureaus (Experian, TransUnion and Equifax). You can do so for free once a week on AnnualCreditReport.com; you can also check your Experian credit report for free anytime.
2. Prioritize your debt. In most cases, it's best to pay off high-interest debt first—like credit cards, payday loans and some personal loans—so you can save money on interest. That's called the debt avalanche method. But if you want quick wins that will encourage you to keep going, try paying off the smallest debts first with the debt snowball strategy. Once you've decided which method to use, make a list of your debts in the order that you want to get rid of them.
3. Pay more than the minimum. This is where your budget comes in. Based on the budgeting plan you've chosen, decide how much you can afford to devote to debt payoff, and send more than the required minimum payment to your highest priority debts each month.
4. Consolidate debt. If you have good credit, you may be able to qualify for a low-interest debt consolidation loan or balance transfer credit card. These can help you consolidate debt into a single monthly payment at a lower average interest rate.
5. Work with a nonprofit credit counselor. You don't have to tackle it all alone. Get in touch with a reputable nonprofit credit counselor, who can help you build a budget and, if it works for you, pay down credit card debt using a debt management plan.

Learn more: What's the Best Way to Pay Off Debt?

Frequently Asked Questions

The Bottom Line

Debt doesn't have to be the enemy, especially if you use it strategically and ensure it won't overwhelm your budget. It's possible to make use of financial products that can get you rewards and grow your credit, yet still stay out of debt. Stick to your spending plan and pay off monthly credit card balances in full, and you'll have taken important steps toward lasting debt freedom.