Debt Payment Strategies That Actually Work

Carrying debt can put a damper on your future financial plans. But what’s the best way to get back in the black as fast possible?

Are you buried under an overwhelming amount of debt? You’re not alone.

According to Bankrate, the average American carries over $90,000 in debt, including student loans, car payments, and mortgages. Credit card debt alone is more than $5,000 per adult, with 75% of people carrying a balance from month to month instead of paying it off.

It might seem impossible now, but you can conquer your debts. The question is how. There are many strategies to paying off debts, and not all of them apply to every situation. These are some of the most popular—and effective—ways to deal with debt. Before you decide to try one, consider talking to a financial planner or debt reduction specialist.

With each of these strategies, the key is being able to pay more than the minimum payment. If you’re struggling to make ends meet, then check out these tips for making extra money.

Avalanche Method

part of the credit card on the table closeup
Adobe Stock

The avalanche method is one of the most popular debt repayment strategies. It starts by listing all your debts and arranging them by interest rate, not balance. While keeping up with your minimum payments on all the accounts, apply any extra cash you can gather to the account with the highest interest rate.

Once you’ve paid down that account, continue making all your regular payments. However, add the minimum monthly payment from the first account to the second account on your list. Keep going down your list, applying all the minimum payments from the paid-off accounts to the next target. Your overall payments will remain the same until all the debt is cleared. By moving from the highest interest rate to the lowest interest rate, you’ll maximize the effectiveness of your payments. Once you reach the final account on your list, it’ll be a cakewalk to pay it off.

Generally, credit cards and personal loans have the highest interest rates. After that, you’ll typically find car loans. Mortgages and student loans have the lowest interest rates—but also the highest balances. The avalanche method is the best way to deal with multiple high-interest lines of credit. It’s also easiest for people who are able to sustain high-dollar debt payments over a longer period of time.  

The avalanche method is not fast, and if you need to see immediate progress to stay motivated, then you might want to try the next strategy on our list.

Snowball Method

Worried African-American looking through correspondence, a guy holds envelopes in hands, got fine by post, concentrated man sitting at the desk with a laptop in contemporary office
Adobe Stock

The snowball method is similar to the avalanche method in that you begin by making a list of your debts. However, instead of arranging them in order of interest rates, you start with the smallest balance first.

You’ll feel accomplished when you cross off a debt from your list, even if it’s a small one. As you progress, you’ll roll the amount you were paying on the previous debts into the next one down the line. By the time you’re ready to take on your biggest balance, you will be able to pay it off quickly thanks to the combined power of all those minimum payments.

Like the avalanche method, the snowball method works best when you’re already able to comfortably afford the minimum payments on your debts plus extra. But what if your budget is already lean? That’s when the next method can help.

Snowflake Method

Closeup image of a woman holding and choosing credit card to use
Adobe Stock

Sticking with the “snow” theme of the last two debt reduction strategies, the snowflake method is best for people with tight budgets and relatively low balances. If you feel like there’s no way you’ll ever be able to pay off a credit card balance in full, the snowflake method can help you gradually accumulate the cash.

This strategy focuses on small changes that can help you save a dollar or two throughout your daily routine. If you would typically spend $10 on lunch, order a smaller drink or skip the side to cut your bill down to $9 instead. That extra buck goes toward your debt. When you pay with cash, keep the coins in a jar. If you start carpooling to work, use the money you saved on gas. You get the idea.

By chipping away at your expenses without sacrificing your overall quality of life, you can gradually pay down your debt. Your goal should always be to pay more than the minimum payment so that you don’t end up getting overwhelmed by interest charges.

With the snowflake method, it’s a good practice to make a payment once a week instead of once a month. That way, you won’t be tempted by the extra cash that accumulates over an entire month. You’ll also get the satisfaction of seeing your debt disappear that much faster.

Read More: Clever Ways to Put More Cash in Your Pocket

Debt Consolidation

looking at bills

As it implies, the debt consolidation strategy takes lots of smaller debts and rolls them into a single, larger balance. The main benefit of this method is that you can eliminate debts with higher interest rates immediately, saving you future interest payments. The average consumer credit card interest rate is 19.5%, as of the time of this writing. Debt consolidation loans can have interest rates as low as 6%, according to NerdWallet.

Unfortunately, there’s a major downside to debt consolidation. If you have poor credit and a high debt-to-income ratio, then you’re unlikely to qualify for the best debt consolidation interest rates. While you could still get a lower overall average rate, it’s important to do the math before you sign anything.

Debt consolidation works best for people who have multiple consumer debts and good to excellent credit. The good news is that if you qualify for a loan with a favorable interest rate, you can eliminate a lot of debts at the same time. That means fewer payments to worry about each month as well as saving the money you would have paid in interest on the original debts. It’s a good idea to funnel those savings into your new consolidation loan to pay it off as quickly as possible.

Balance Transfers

couple managing debt together casually on floor of their home

Balance transfers are a type of debt consolidation, but let’s talk about them as a separate strategy. With a balance transfer, you essentially use a new credit card to pay off one or more consumer debts. Many balance transfer credit cards offer 0% APR for the first 6-18 months, giving you a window to pay off the debt without accruing any additional interest.

Balance transfers are best for people who have multiple smaller debts. If you have good to excellent credit, you’ll have a good chance of qualifying for a card with the longest interest-free introductory period and the most favorable terms overall. However, if you have bad credit, there’s still hope. Some balance transfer credit cards may offer a better interest rate than your current debts, even if they don’t have a 0% APR period. You can read more about the pros and cons of this debt payment strategy here.

With all balance transfers, make sure to read the fine print. That includes any annual fees, the exact length and terms of the introductory period, the APR after that period, and—most importantly—the transfer fees charged by the issuer. You can expect to pay 3-5% of the total balance being transferred in fees.

Debt Settlement

Rubber stamp with the text past due over an invoice document. 3D illustration. Concept of unpaid debt recovery.
Adobe Stock

Let’s say that you’ve already been struggling to pay off your debts. One or more of them are now past due and have gone into collections. At this point, you don’t have the time to pursue the other strategies on this list—and you probably don’t have the capital or the credit score to pay off the debts in full. Otherwise, you wouldn’t be in this situation.

You can try calling each of your creditors to discuss settling your debts for less than the total balance. When collection agencies purchase debts, they do so for pennies on the dollar. That means they can afford to accept less than the balance you owe on paper. You’ll have to negotiate for the best terms, so remember to be polite and calm—even if you feel frustrated.

Get the company in question to send you a letter in writing with the offer. If you’re settling, you will likely need to pay off the debt in a lump sum or a few smaller payments made by automatic withdrawal.

The downside is to this method—other than the humiliation and frustration involved—is that your credit score may take a while to heal if the debt is considered a “charge off.” You also may have to pay taxes on the canceled debt. The IRS makes exceptions for certain types of canceled debt, which you can read about in detail on their website.  

Latest News