How to avoid debt (and stay out of it)

Nine tips to avoid debt

1. Make a budget

Creating a budget can make it easy to see where each dollar is going, enabling you to identify areas where you can reduce spending and save money. Write down your monthly after-tax income, list your monthly fixed and variable expenses (such as groceries, utilities, entertainment, insurance payments, minimum debt payments, personal care), and sort these expenses into three categories—essentials, nonessentials, and savings/debt repayments. When it comes to your loans, make at least the minimum payments on all of them, but concentrate on paying off the ones with the highest interest rates or the ones with variable rates first. If you’re unemployed, you may be eligible to defer your loans for a period. It’s always better to ask the loan company about your options than to make assumptions or to default.

2. Pay your existing bills on time

Paying your bills on time and in full can help you avoid late fees and high interest rates. If you’re not able to pay the total balance, try to pay more than the minimum payment to lower the amount going to interest and fees. Making consistent payments—full, more than the minimum, or the minimum—is a very important factor in maintaining a good credit score. It is especially crucial if you’re planning to purchase a home, finance a car, or apply for a small-business loan in the future.

3. Create an emergency fund

After organizing your loan repayments, you can try to put aside a small amount every month for emergencies. If an unexpected expense arises, an emergency fund can help you avoid relying on credit cards or loans, which could turn into long-term debt.

4. Avoid lifestyle inflation

When you earn more—through a raise or a bonus—it can be tempting to spend more. Keeping your spending in check as your income grows helps ensure that you don’t overextend yourself and end up in debt. If you maintain the same spending habits even as you earn more, you can direct the extra money toward paying off existing debt or building savings instead of accumulating new debt.

5. Regularly review your credit report

Mistakes on your credit report can lower your credit score and potentially increase the interest rates you pay on loans and credit cards. Fixing errors early can help you stay out of debt in the long run.

6. Set up automated payments

Automating your bill payments—whether it’s utilities, credit cards, or rent—helps ensure that you’re never late and don’t incur unnecessary fees or interest charges. This strategy can protect your credit score by guaranteeing on-time payments. You can also automate transfers into a savings account, so you consistently build up funds for emergencies or planned purchases without having to rely on debt.

7. Purchase life insurance

Certain types of life insurance policies (such as whole life or universal life) have a cash value component that you can access¹ if you need funds in an emergency. Accessing the available cash value may help you avoid turning to credit cards or personal loans. While it’s true that If you pass away, the death benefit can protect your loved one’s existing debts, permanent life insurance with cash value also provides benefits during your lifetime, allowing you to access funds to help pay down debt, and it can help with future expenses, such as buying a house or starting a business.¹

8. Pay with cash

If you have a large amount of credit card debt, switching to paying with cash can help you reduce and avoid further debt. Using cash also forces you to stick to a tangible spending limit, reducing the risk of impulse buying.

9. Limit the number of credit cards you own

When considering how to avoid credit card debt, it’s less about how many cards you have and more about using them responsibly. But it’s generally recommended that you limit yourself to two to three credit card accounts at a time. While having multiple credit cards can sometimes benefit your credit score, you run the risk of spending more in credit than you’re able to repay. Pay off your balance in full whenever possible and keep track of each card’s due date so you don’t incur late fees or high interest charges.

How to stay out of debt

While "avoiding debt" focuses on preventing new debt and establishing solid financial footing, "staying out of debt" means preserving those hard-earned habits in the long run. Even when you’re free from burdensome balances, it’s crucial to remain vigilant. Continue to follow your budget, review your financial goals regularly, and adjust your spending or savings plan as necessary.

Use any surplus money (like a raise or bonus) to pay down existing loans or boost your emergency fund. This helps you avoid what’s often called the “debt trap,” where any unexpected expense forces you to rely on high-interest credit. Maintaining healthy credit card use by paying off your balance each month and living below your means are additional ways to stay free of debt. If you find yourself struggling, seek professional financial guidance to get back on track and keep you from falling into debt again.

Avoiding debt FAQs

RELATED CONTENT

¹Accessing cash value reduces the death benefit and available cash surrender value.

² Experian Average credit card debt by age in 2025. https://www.experian.com/blogs/ask-experian/research/credit-card-debt-by-age/