6 Strategies to Pay Off Your Debt That Work

Ready to pay off your debt? The first step is to create a debt payoff plan. If you only have one debt, your strategy is simple: make the biggest monthly debt payment you can handle. Rinse and repeat, until it’s all gone.

But if you’re like most people in debt, you have multiple debts to manage. And in that situation, you need to find a method that appeals to you. Many people turn to the strategies often exhorted by financial guru Dave Ramsey: the debt snowball and the debt avalanche. We’ll explain both of those below, as well as alternatives like balance transfers, personal loans, and bankruptcy.

1. The Avalanche Method

With this strategy, also known as debt stacking, you’ll pay off your accounts in order from the highest interest rate to the least.

Here’s how it works:

Step 1: Make the minimum payment on all of your accounts.

Step 2: Put as much extra money as possible toward the account with the highest interest rate.

Step 3: Once that debt is paid off, start paying as much as you can on the account with the next highest interest rate. Continue like that until all your debts are paid.

Every time you pay off an account, you’ll have more money to put towards the next one. And since you’re tackling your debts in order of interest rate, you’ll pay less overall and be out of debt more quickly.

Like an avalanche, it might take a while before you see anything happen. But after you gain some momentum, your debts (and the amount of interest you’re paying on them) will fall away like a rushing wall of snow.

Example of the Debt Avalanche in Action

TYPE OF DEBT	BALANCE	INTEREST RATE (APR)
Auto Loan	$15,000	4.5%
Credit Card	$7,000	22.0%
Student Loan	$25,000	5.5%
Personal Loan	$5,000	10.0%

To use the debt avalanche method:

• Always pay the monthly minimum required payment for each account.
• Put any extra money toward the account with the highest interest rate: the credit card.
• Once the credit card debt is paid off, use the money you were putting towards it to vanquish the next highest interest rate: the personal loan.
• Once the personal loan is paid off, take what you’ve been paying and add it to your payments for the student loan.
• Once the student loan is paid off, take what you’ve been paying and add it to your payments for the auto loan.

So, you’ll end up paying off your accounts in this order:

1. Credit Card ($7,000)
2. Personal Loan ($5,000)
3. Student Loan ($15,000)
4. Auto Loan ($25,000)

Pros and Cons of the Debt Avalanche

The debt avalanche will help you pay less in interest — and will get you out of debt more quickly. You’ll also have the satisfaction of seeing the highest interest rates disappear.

That’s why the debt avalanche is our recommended method for paying off debt.

The downside? It’ll generally take longer to see progress than with the debt snowball. So if you’re counting on some small wins to get you motivated, the next method may be a better fit for you.

2. The Snowball Method

With the debt snowball, you’ll pay off your debts in order from the smallest balance to the largest.

Many people love this method because it includes a series of small successes at the beginning — which will give you the necessary motivation to pay off the rest of your debt.

Here’s how it works:

Step 1: Make the minimum payment on all of your accounts.

Step 2: Put as much extra money as possible toward the account with the smallest balance.

Step 3: Once that debt is paid off, take the money you were putting toward it — and funnel it toward your next smallest debt instead. Continue like that until all your debts are paid.

In other words, you take aim at your smallest balance first, regardless of interest rates. Once that’s paid off, you focus on the account with the next smallest balance.

Think of a snowball rolling along the ground: as it gets bigger, it can pick up more and more snow. Each conquered balance gives you more money to help pay off the next one more quickly. When you pay off your smallest debts first, those paid-off accounts build up your motivation to keep paying off debt.

Example of the Debt Snowball in Action

Say you have four different debts:

TYPE OF DEBT	BALANCE	INTEREST RATE (APR)
Auto Loan	$15,000	4.5%
Credit Card	$7,000	22.0%
Student Loan	$25,000	5.5%
Personal Loan	$5,000	10.0%

To use the debt snowball method:

3. Balance Transfers

While the debt snowball and avalanche are two overarching strategies for how to pay off debt, here are some specific techniques you can use in conjunction with them.

When you have credit card debt, one option is to transfer your credit card balance to a different card.

If you have an account with a high interest rate, for example, you can transfer its balance to a card with a lower interest rate — and therefore spend less in interest over time. This is like paying off one credit card using another card.

This fits well with the avalanche method, since you can use a balance transfer to strategically reduce the interest rate on your highest-interest debt. That can buy you time to focus on the next-highest interest account, and reduce the total interest you pay.

Many balance transfer credit cards even offer a 0% APR for an introductory period, which allows you to pay off your balance without incurring extra interest charges.

Say you have $6,000 of credit card debt at an 18% APR. You could transfer that balance to a card that offers 0% APR for the first year. If you pay off your debt in that period, you’d save more than $600 in interest.

Note: you’ll probably have to pay a balance transfer fee, so be sure to run the numbers and read the fine print before going this route. But a few credit cards offer 0% APR balance transfers for no fee.

4. Personal Loan

While paying off credit card debt outright is usually the smartest financial strategy, it can sometimes seem overwhelming.

In situations where you have several different cards (and statements, and due dates), paying them off with a personal loan can be a good idea.

The benefits of this route include:

• It can help your credit scores: Because a personal loan is an installment loan, it doesn’t hurt your credit the way revolving loans (like credit cards) do. So paying off your credit card debt with an installment loan can significantly boost your credit, especially if you don’t already have any installment loans on your credit reports.
• It can mitigate overload: Reducing the number of payments you need to make each month will make your life easier.
• It can save you money: Personal loan interest rates are often lower than credit card interest rates, so you’ll end up paying less overall.

That being said, taking out a loan to pay off credit card debt can be dangerous. Follow the terms of the loan carefully, or you could just make your situation worse. Avoid this route if you don’t trust yourself to use credit responsibly, as you’ll likely just end up further in debt.

If you do use this strategy, remember these key points:

1. Keep credit cards open: Don’t close the credit cards you pay off, unless they have annual fees you don’t want to pay. Keep them open to help your credit utilization and average age of accounts.
2. Cut back on credit card spending: Don’t spend any more money on your paid-off credit cards. If you must, hide them or cut them up.
3. Be a responsible borrower: Make regular, punctual payments on your installment loan. If you don’t, you’ll just create more problems for your credit.

5. Debt Settlements

If you have outstanding debts to pay and can make a large one-time payment, settlement might be the right option for you.

Debt settlement is a negotiation in which a creditor, like a credit card company or collections agency, agrees to accept a partial payment rather than the full balance. You might be eligible if you’ve undergone hardships like job loss, medical problems, or divorce.

When you settle your debt, you can sometimes pay 50% — or less — of the original balance. You may, however, have to pay taxes on the forgiven amount.

If you choose to engage in debt settlement, you should do extensive research to avoid scammers and exorbitant fees. Learn what to watch out for at the FTC Consumer Information website.

6. Bankruptcy

When you’ve reached your limits and have nowhere else to turn, bankruptcy can offer a fresh start. You should only use it as a last resort, however, because bankruptcy can devastate your credit.

There are two types of personal bankruptcy:

• Chapter 7, which often requires you to surrender some of your property.
• Chapter 13, which allows you to keep your property.

Declaring either type of bankruptcy can be a long, expensive process — including attorney and court filing fees — and you shouldn’t take it lightly. Before considering bankruptcy, you must seek credit counseling.

When you’re swimming in red-letter bills and harassing phone calls, it can often feel like there’s no way out. But by using the strategies above, you can eventually free yourself from the shackles of debt.