10 Methods to Help Pay Off Debt
Looking for the fastest way to pay off credit card debt? The best approach may vary depending on your situation.
There’s no sugar-coating it: Americans are in debt. And while the presence of debt isn’t necessarily a bad thing, many of us would like to get rid of high-rate credit card debt. The average household credit card debt totaled $5,315 in 2020, and 75% of U.S. adults routinely carry a credit card balance from month to month.1
The benefits of eliminating credit card debt are obvious. Zero debt means zero interest payments —meaning you keep more of your money for yourself.
- The current average credit card interest rate is 14.5%2, or roughly $650 per year on a $5,000 balance (paying the minimum required each month).
That extra money could go into savings, contribute to your mortgage, or fund a vacation. And depending on how much of your available credit you’re using, paying it off could result in a boost to your credit score.3 Here’s how to find a strategy that will work for you.
Winter Is Coming: Three Debt-Repayment Methods
The first step to getting your debt in order is to face the problem head-on. Figure out everything you owe, including credit cards, student loans, and medical bills, and add it up. The sum may be larger than you anticipated, and that’s OK — you’re already taking a step in the right direction.
Next, you might wonder which debt to pay off first. There are a few schools of thought, all with pros and cons. The best debt repayment method for you will depend on your budget, the kind of debt you have to repay, how quickly you want to be debt-free, and other lifestyle factors.
The Snowball Method
This method — where you pay off your debts from smallest to largest — allows you to build momentum as you pay down your debts (think of a snowball gradually growing bigger as it rolls). While you’ll keep up on all of your bills by sending in the minimum payment each month, you’ll focus on your smallest debt, funneling all that you can into it. Once it’s paid off, move on to your second-smallest amount, concentrating on getting that to zero.
While starting with the largest debt or highest interest rate might make more sense from a sheer dollars-and-cents perspective, the psychological benefits of eliminating individual debts shouldn’t be underestimated. The snowball method lets you make progress quickly, which is a great feeling. The quick (or even not-so-quick) wins you may experience along the way can help keep you committed.
Example: Steven Snowball
Steven focuses first on Credit Card #1, paying as much as possible toward it each month, and paying the minimum on the other three debts. Once the $850 is paid off, he will begin to tackle Credit Card #2. He doesn’t take interest rates into account.
The Avalanche Method
To employ the avalanche method, you’ll first tackle your debt with the highest interest rate and pay the minimum payment on all other balances. The advantage over the snowball method is you’ll likely incur fewer interest charges, but it may take longer to feel like you’re making headway.
Example: Allison Avalanche
Allison targets Credit Card #2 first, as it has the highest interest rate and therefore her interest (and her total debt) will accrue faster if left unpaid. She will keep up with minimum payments on the other accounts until this one is paid off, then address Credit Card #1.
The Blizzard Method
This hybrid combines the quick-win feeling of the snowball method with the interest-rate-reduction strategy of the avalanche plan. Start by using the snowball strategy and tackling your smallest debt. Once that’s paid in full, you’ll switch to the avalanche approach, focusing on the debt with the highest interest rate.
Example: Brian Blizzard
- Credit Card #1 has a balance of $850 and an interest rate of 16.7%
- Credit Card #2 has a balance of $3,000 and an interest rate of 22.4%
- Auto Loan has a balance of $5,000 and an interest rate of 8.2%
- Credit Card #3 has a balance of $7,500 and an interest rate of 9.3%
Brian will focus initially on Credit Card #1. Once his smallest debt is paid off and he feels a sense of momentum, he’ll start aggressively paying down Credit Card #2.
Some view this as the “Goldilocks” approach, as it allows for both psychological and mathematical victories.
The Savings Scenario: You may opt to balance paying off debt with adding to your savings. Whether you’re saving for a major purchase, an emergency, or retirement, a good rule to follow for your budget is the 50-30-20 breakdown. Allocate 50% of your take-home pay to your regular monthly bills (housing, utilities, groceries, etc.), 30% for discretionary purchases, and 20% split between savings and paying off debt. Want to eliminate your debt and grow your savings faster? Cut down on those nonessential expenses and tap into that 30%.
How to Pay Off Debt Fast: Six Tips
- Negotiate a lower interest rate: Creditors would rather you repay your debt at a lower rate than default, so they may be willing to negotiate a lower interest. The worst they can say is “no,” so don’t be afraid to ask.
- Leverage any extra cash: It’s easy to spend holiday bonuses, tax refunds and even raises on discretionary items. But think of your long-term future. When you can, direct any “extra” funds to paying off your debt.
- Get brutally honest with your budget: One question many people have is how to pay off debt fast with low income. Even if your budget is tight, small changes can add up. List all of your expenses and see if there is anything to cut out. If you can only spare $20 a month, that’s $20 you can put toward reducing your debt.
- Consider a side gig: You don’t need to dedicate every minute of your spare time to a rideshare or shopping service. Start small, with freelance projects that take a few hours at a time. If you can use the experience to hone a skill you already have (such as tutoring, technical writing, or light construction), it’s a win-win.
And to make sure you aren’t taking a step back by racking up new debt, make sure you’re doing the following:
- Clear out your payment information cookies: If online shopping routinely eats up a chunk of your budget each month, this simple trick may help. You’d be surprised how removing your credit card information from online stores can help you spend less.
- Stop using your credit cards: It’s tricky to make headway if you keep adding to your debt. Use cash — or a debit card tied to your checking account — to ensure you’re only spending money you have.
If juggling multiple, high-rate debts is weighing you down, debt consolidation may be a good option. Exactly what it sounds like, a debt consolidation loan consolidates multiple debts, ideally at a lower overall interest rate. The result is one single monthly payment, which is easier for many people to monitor and manage.
Using a personal loan to consolidate debt (versus a credit card balance transfer) may also have a positive impact on your credit utilization ratio, and therefore your credit score. In the examples above, a consolidated loan might combine the total amount owed ($12,250) into one monthly payment obligation. In this scenario, three credit cards would now have zero balances. This approach has been a go-to debt-repayment solution for many; more than 20% of all Americans have a personal loan, and one of the most popular uses of these loans is to consolidate debt.1
Getting out of debt is incredibly rewarding but like any achievement, it takes discipline and work. Whether you take the avalanche or snowball route, pursue a side hustle, consolidate your debts, or use a combination of methods, what’s most important is finding a debt-repayment strategy that’s sustainable for you. Consider your budgetary obligations, your lifestyle, and your priorities as you weigh the advantages and disadvantages of all of these approaches.
Consolidating your debts may be a good way to get out of debt on your terms. Check out your loan options today, with no obligation or impact to your credit score.
- “Experian 2020 Consumer Credit Review,” Jan. 4, 2021, Experian
- “Federal Reserve Statistical Release: Consumer Credit, August 2021,” Oct. 7, 2021, The Federal Reserve Board of Governors
- “If I Pay Off a Credit Card, Will My Credit Score Change?” Dec. 19, 2020, The Ascent