Americans are drowning in debt — $1.2 trillion, as of the second quarter of 2025, according to the Federal Reserve Bank of New York. That staggering figure is up 5.87% from last year. Factors for the rise in debt include economic conditions, inflation and consumer spending habits. But no matter the reason, people need relief.
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One way to help manage credit card balances that finance experts swear by is the 20% rule. “[A rule that] recommends keeping long-term debt to no more than 20% of your annual income, and keeping short-term debt to no more than 10% of your monthly income,” explained Jason Pack, debt expert and chief revenue officer at Freedom Debt Relief.
Below is how the trick works and what to know about the 20% rule, according to experts.
According to SoFi, the 20% rule is a popular guideline that divides your after-tax income into three categories:
50% for essential needs (housing, groceries, utilities, transportation)
30% for discretionary spending (entertainment, dining out, hobbies)
20% for financial goals — either savings (like an emergency fund) or paying down debt
This budgeting method is simple, flexible and encourages a healthier relationship with money by ensuring that a portion of each paycheck is consistently allocated toward goals.
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Managing credit card debt can keep more money in your pocket because you can save on paying interest. Not having a high balance on cards also relieves stress, protects your financial health and can improve your credit score, but it’s not always easy to get it under control. That’s where the 20% rule can help.
“The budgeting rule can be effective in paying down credit card debt because it allocates a portion of a consumer’s budget specifically to debt repayment or savings,” said Leslie Tayne, personal finance expert and founder and head attorney at Tayne Law Group. “This structure is beneficial in that it helps the consumer prioritize savings on payday, instead of allowing unnecessary spending to occur.”
It’s important to note that the 20% rule isn’t meant for paying off debt, instead keeping it in check, Pack said.
“To pay down existing credit card debt, strategies like a balance-transfer card, personal (debt consolidation) loan, debt management plan or, in some situations, debt settlement, can be effective,” he added.
