Banking and Finance

5 Actionable Steps for How to Pay Off Debt During a Recession

Elizabeth
July 27, 2021

Shortly before the coronavirus crisis rattled the global economy, the level of household debt service as a percentage of disposable personal income in the United States hit all-time lows we haven’t seen since 1980. In fact, it reached $14 trillion for the first time ever.


More recent studies show that the average debt per household in America is $137,063, with household consumer debt now worth 75.4% of US GDP. While these statistics aren’t meant to alarm anybody, it paints an interesting picture of the status of consumer debt in the country, especially as we head into a recession that’s projected to be worse than the Great Recession of 2008.


If you’re one of the millions of Americans who have debt and are trying to make it through the imminent recession while still paying off what you owe, we’re here to help. Here are five actionable steps you can take to pay off debt during a recession, or really any time for that matter.

1. Figure Out How Much You Owe

While this one might sound simple, a lot of people actually don’t know how much they really owe in debt altogether. The first step in paying off debt during a recession is to sit down and crunch some numbers. Credit Karma spoke with a Goldman Sachs representative who said that “Consumers may have multiple credit cards, and they may be unsure what the total is across all of the accounts. So being able to visualize what you owe across different accounts is an important first step.”


Also, understand that the recession definition simply means that there is a decline in general economic activity and the nation’s GDP falls for two successive quarters. How this affects people depends on whether or not your job was affected and various other factors. So, simply because the country is in a recession doesn’t mean your finances will be affected on a large scale.

2. Decide on a Repayment Plan

When assessing your total debt owed, take a look at three keys factors: the due date for each payment, the minimum monthly payment due, and the interest rate. This will help you understand your options in terms of repayment plans and which repayment plan is best during a recession given your overall financial situation. Typically, people follow one of two main debt repayment strategies, which are the debt snowball and debt avalanche strategies. When following the debt snowball strategy, you focus on and tackle the smallest debt first. When following the debt avalanche strategy, you focus on paying off the debt with the highest interest rate first. 


Focusing on paying off one debt, whether it’s the smallest amount or the one with the highest interest rate, is more actionable than using money to spread payments across your debt evenly. Some experts recommend actually taking a more emotional approach to this, suggesting that people are more likely to finish paying off their debt entirely if they’re tackling the debt that most annoys and bothers them. However, we’d suggest opting to pay off high-interest debt first.

3. Lower Your Interest Rates

Lower Your Interest Rates

There are a few ways to pay off debt during a recession while also lowering the amount of debt you’ll ultimately owe in the long-run. Lowering your interest rates is the best way to avoid paying more cash overall, and it’s usually quite easy to do, or at least easy to ask about. Simply call your credit card company and ask if they’re willing to lower your interest rates or if there are any other debt consolidation options through them such as a balance transfer to a new card with a low or no interest fee.


In March, the Federal Reserve slashed interest rates to near-zero amidst growing concerns over the economic impact and hardships about to be faced due to the coronavirus. This is great news for those trying to pay off debt. Consolidate your debt and then take advantage of low personal loan interest rates. Consider taking out a personal loan with a fixed interest rate in order to pay off the debt. 

4. Use a Cash-Only System

Getting your debt under control and coming up with a plan is only part of working towards paying off debt during a recession. You’ll also have to implement a few spending and savings strategies, too. A 2018 ValuePenguin report showed that consumers were willing to pay as much as 83% more when paying with a credit card, which means that if you’re paying with a card, it’s incredibly tempting to spend more than you need to be.


Instead, use a cash-only system to cut back on your spending and help you save more money that you can then put back into paying off your debt. If it helps, come up with a clear budget for your expenses and then head to the store or out to dinner with just cash in hand. This will help you avoid over-spending in categories where you can’t afford it and ensure that the extra cash you do have during the financial crisis is put towards paying off your debt faster.

5. Cut Back Spending

Last, but certainly not least, is our suggestion to find every way you can to cut back spending. As families begin to reorganize their finances and figure out ways in which to cut their expenses via mortgage forbearance, for example, it’s likely that you’ll have to find ways in which to cut back spending in order to be able to afford to pay off more debt. Try not to focus on anything to do with a recession and simply realize that this is a normal debt repayment strategy that many people use to pay off their debt faster.


If it helps, download a budgeting app or create a spreadsheet of spending categories in which you can reduce your spending. The Federal Trade Commission has a downloadable budget template with six simple spending categories to focus on including housing, food, transportation, health, personal and family, and finance. Use this to get an honest idea about your spending and figure out where you can save even more.

Bonus: Earn More Money While Spending

It’s inevitable that you’ll have to spend money during a recession. It’s a part of daily life. So, when you do spend money, make sure you’re spending with a savings-optimized debit card that won’t accrue more debt but, instead, add more cash into your pockets. 


Look into something like a Cheese debit card that will allow you to enjoy zero fees when spending and also get cashback and saving bonuses. It requires that you do literally, absolutely nothing aside from sign up. Saving money to use to pay off debt without any extra work? It doesn’t get much easier than that. Sign up today to begin optimizing your finances.

More articles about how to prepare for a recession:

💪How to Prepare for a Recession?

Are 401K Investments Safe in a Recession?

Drawing On 2008: Which Stocks to Buy During a Recession

How to Protect Credit Health During a Recession?

Tips to Cultivate a Recession-Resistant Investment Plan