Ways to Pay Off Debt

Understanding your debt

Before you can make significant progress on paying off your debt, look closely at your finances. Understanding your debts and the varying interest rates and terms they come with will help you prioritize their payoff.

Some types of debt, such as a mortgage, can take many years — even decades — to pay off. Consider every type of debt you currently have. This may include a mortgage, car loan, credit card debt, medical debt or personal loans. Start by listing all of your debts, including amounts and interest rates. Getting everything organized can help you know where to begin.

If you have student loan debt, you should check whether you qualify for any student loan forgiveness programs. There are also certain repayment assistance programs, such as income-driven repayment, although you want to be cautious of programs that result in your balance increasing as you pay your loans off.

Credit cards are likely to be the debt with the highest interest rate. Data from the Federal Reserve showed the average annual percentage rate (APR) on credit card accounts with assessed interest was 22.75% as of November 2023.

Prior to making a plan to deal with your debt, create a listing of your outstanding balances, the original creditors and the interest rate each account charges. It’s also useful to verify your minimum payment amount so you can start with that when determining your monthly budget while paying off debt.

» LEARN: How to get student loan forgiveness

Importance of a budget for debt repayment

In order to manage your debt and gradually pay it off, you’ll need a budget. If you’ve never created a budget, you might be surprised at your spending.

Following a budget will help you achieve debt freedom, but it will continue to be crucial for the rest of your financial life. Once you pay off your debt, smart budgeting habits strengthen you as you move forward, helping prevent you from going back into debt.

Great budgeting apps are available that can simplify the way you create and follow your budget, so look for a tool that fits your lifestyle (if pencil and paper aren’t your thing).

You can begin by tracking your spending for a month or so, then create a budget based on your habits. Pay attention to fixed versus variable expenses. Your fixed expenses are those such as rent, which you have to pay in the same amount every month. Variable expenses are the ones you can potentially reduce in order to funnel more toward debt payoff.

During debt payoff, you may pour any money that’s left over after necessary expenses into debt payments. Remember that minimum payments should be considered a non-negotiable expense.

Determine how much you can realistically pay every month toward debt before you move on to the next step: deciding which debt payment strategy is best for you.

» MORE: Debt settlement pros and cons

Debt snowball vs. debt avalanche

The best option for anyone with debt is to pay it off rather than settling to pay less than you owe. This ensures you fulfill your financial obligations, keeping you in good financial standing. It makes it easier to obtain financing in the future as well.

If you’re getting serious about paying down your debts, two methods are the debt snowball and the debt avalanche. With both methods, you pay off all of your debt eventually, but you prioritize individual debts differently.

The debt snowball method entails paying the minimum amount on all debts and putting any additional funds toward the smallest debt until it’s fully paid. For instance, if you had three different debts from loans or credit cards totaling $600, $1,600 and $16,000, you’d pay off the $600 debt first.

The debt snowball allows you to celebrate small wins. Paying off a relatively small amount right away can offer a burst of pride that fuels your momentum to knock out the next-smallest debt.

With a debt avalanche, you still make the minimum payments on all debts to avoid incurring extra fees. But instead of paying off your smallest dollar-amount debt first, you list your debts according to their interest rates. You then funnel any extra money toward the highest-interest-rate debt until you’ve paid it in full. You will continue paying off loans from the highest interest rate to the lowest.

Key differences between the debt snowball and debt avalanche

Who might choose the debt snowball?

In terms of debt payoff methods, the debt snowball is great for anyone, but especially if you are someone who needs a bit of encouragement. Seeing one of your lower balances drop to zero can provide confidence, and once the first debt is gone, you can put the money that was going toward it into paying off the next smallest balance.

Who might choose the debt avalanche?

For someone focused on the bottom line, using the debt avalanche may be more satisfying. Paying off the debt with the highest interest rate should save you money in the long run. If you’re already committed to debt payoff, you might not need the thrill of small wins you get from the debt snowball.

» MORE: Debt avalanche method: pros and cons

Consolidate your debt

Consolidating your debt is one way to make your debt payoff more manageable. Debt consolidation loans from a bank or finance company allow you to roll multiple debts into a new loan. The best situation is a new loan at a lower interest rate than you’ve been paying on the individual debts.

Leslie Tayne, a financial attorney and the founder of Tayne Law Group, said that a debt consolidation loan “can simplify your payments and potentially save you money on interest, helping you to pay off debt faster.”

By rolling multiple debts (such as credit cards from several different issuers) into one account, you get the ease of making a single monthly payment to one lender. If you’re struggling to keep track of numerous loans and missing payments, consolidating may solve that issue and help you focus on repayment.

Similarly to a consolidation loan, Tayne noted, “Transferring high-interest credit card debt to a card with a promotional 0% interest rate can help reduce the amount of interest you pay and allow more of your payments to go toward reducing the principal balance.”

A line of credit, home equity loan or 401(k) loan may be other options for consolidation. Each of these has its own pitfalls and benefits.

Debt consolidation can be a very effective way to pay off loans more quickly, especially if you can secure 0% or a low interest rate on the loan or balance transfer. It also helps you organize your finances so you’re not juggling multiple payment due dates and amounts.

There are some potential hurdles to consider. Tayne said, “Debt consolidation usually requires that you have good credit to qualify for a new loan or credit card, however, so this may not be a possibility if your score is already damaged by several missed payments.”

In addition, the Federal Trade Commission (FTC) cautions that some consolidation loans require you to put your home up as collateral, and there may be other costs to the loan that impact your savings.

» MORE: Does debt consolidation hurt your credit?

Negotiate with creditors

You may be able to negotiate credit card debt or other unsecured debt. Factors that may be up for negotiation include interest rates, monthly payments and even the balance.

While card companies don’t have to offer any wiggle room, you have the right to call them and request that they work with you. You’ll need to demonstrate financial hardship. And though you can do this yourself, Tayne recommended consulting with a debt relief attorney or having your attorney negotiate on your behalf.

If you decide to attempt negotiating with creditors, be clear about what you want. You may ask for a reduced interest rate, which should lower your minimum monthly payment and lead to lower fees over time. You might also request a temporary pause in your payments (and ask for a waiver of fees during that time).

A more drastic option is debt settlement, in which you or a third party try to negotiate with the creditor to seek a large reduction in your balance. However, this can be risky, and the Consumer Financial Protection Bureau (CFPB) urges caution if working with debt settlement companies. Not all creditors work with them, and their fees can eat into your savings.

Tayne explained when debt settlement may be useful: “If you're facing a large amount of debt that you realistically can’t pay off within a reasonable time frame, debt settlement could be a smart way to find relief.” However, she noted that the damage to your credit makes it less than ideal compared to paying off your debt in full.

» MORE: How much does a debt relief program cost?

Seek professional help

In some cases, it may be wisest to seek the expertise of a professional to help you navigate the decisions involved in paying off your debt. Working with a credit counselor can provide you with free or low-cost guidance on your available options.

Look for a credit counselor through the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). The CFPB advises that you verify the reputation of credit counseling agencies through your state attorney general or a state consumer protection agency before selecting one.

A credit counselor may assist you with creating a budget, monitoring your credit report, debt payoff and general financial management. One product credit counselors may offer is a debt management plan (DMP).

DMPs work much like a consolidation loan. Your credit counselor negotiates with creditors to develop manageable monthly payments for you, and you make payments to the plan’s administrator. However, there are fees associated with these plans, and you need to be sure your credit counselor is trustworthy and will get payments to your creditors as agreed.

You’ll often pay a one-time setup fee for a DMP plus a monthly fee. As an example of these costs, InCharge Debt Solutions says its average monthly DMP fee is $33. American Consumer Credit Counseling offers DMPs with a $7 maintenance fee and a $39 enrollment fee.

Even if you don’t decide on a DMP, meeting with a certified credit counselor can help you get a firmer handle on your finances and make a plan to pay off your debt.

» MORE: Everything you need to know about cancellation of debt (COD)

Prevent future debt

No matter what debt repayment method you pursue, you need to be on guard against future debt. While you should feel fantastic after knocking out a significant amount of debt, don’t use that as an excuse to fall back into old habits and end up in the same situation.

After paying off debt, you have the opportunity to move forward with financial goals in a way you previously could not. Use the extra funds freed up to pursue other aspects of financial stability. These can include building up your emergency fund or setting up savings and investment accounts.

Having an emergency fund to cover several months’ worth of expenses is key to avoiding future debt. Often, people turn to credit cards to float them through unexpected expenses, but having some money saved for those situations can mean the difference between returning to debt or not.

Be sure to watch out for any situations that tempt you to go further into debt. While it may be necessary in some instances, avoid high-interest debt in particular and pay attention to your overall spending habits. This is where budgeting comes in handy. Stick closely to your monthly budget and keep unnecessary expenses on the lower side whenever you can.

Another part of your financial picture to be aware of after a debt payoff journey is your credit score. You need to monitor your credit and check your credit reports regularly. Your credit score may have taken a hit while you were in debt, so close monitoring is important as you repair the damage.

The worst thing to do after navigating through a debt problem is to take out more loans that you’re unable to pay. Getting yourself on solid financial footing through budgeting and smart money management habits will serve you for the rest of your life.

FAQ

Bottom line

It can be impossible to think about much else when you’re battling your way through debt payoff. The best way to start making progress toward paying off debt is to examine your debt honestly and come up with a game plan that fits your circumstances.

The debt snowball and debt avalanche are well-tested forms of debt payoff, but other strategies like debt consolidation and seeking interest reduction can also be useful. Don’t give up, and don’t be afraid to talk to a credit counselor if you need some extra guidance along the way.