How to Pay Off Debt

According to the Federal Reserve, American consumers’ debt levels are at about $16 trillion. Despite the fact that Americans have steadily reported that they had more disposable income almost every year since 2013, their spending has rapidly increased. In 2023, consumer debt was over 4.5 percent higher than 2022.

From seemingly never-ending student loan debt to crushing credit card interest rates, it can feel impossible to work your way out of debt. However, there are a number of strategies and methods that you can use to conquer your debt. Consider using one of our debt-reduction strategies to finally free yourself — no matter how much you owe.

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Choose a Debt-reducing Strategy

The strategy you’ll use to conquer your debt will largely depend upon how much you owe, how many outstanding debts you have and your interest rates. Here are some simple steps you can take to find more money to put toward your debt payments:

• Use a budgeting app. Budgeting apps can help you figure out where your money is really going in a convenient digital package. Mint, the most popular personal finance app on the market, offers budgeting and spending tracking features that can help you save small amounts of money with little to no effort. Looking for a more comprehensive budgeting tool? There are a number of alternatives to Mint available for both the Android and iOS platform.
• Stop the bleeding. You can’t work toward a debt-free life if you keep accumulating more on top of the debts you’ve paid off. Analyze your spending and look for places you can cut back, then divert this money towards your first debt.
• Set realistic goals. Most consumers save more when they take on small, attainable goals. Instead of aiming to save thousands in a single month, commit to saving $20 a week, then slowly increase your savings goals.

How to Pay Off Your Debt: 5 Effective Strategies to Try

Method 1: The Debt Snowball Method

The debt snowball method of debt reduction dictates that you’ll pay off the smallest balance you owe first, work your way up to the largest debt and make minimum interest payments on all of your outstanding accounts.

Here’s How it Works:

First, write down the amounts you owe on all of your outstanding accounts in one convenient place, along with their minimum balances. Start with the smallest debt balance, put all of your disposable income toward your debt and schedule minimum payment balances on all of your larger accounts. When the smallest debt is paid off, repeat the process with the second largest debt, then the third largest, etc.

Repeat this process until you’ve paid off your most expensive account.

Many consumers consider the debt snowball method to be the most satisfying and motivating because they can quickly see progress in their debt reduction plan. However, you may end up paying more over time if your higher balance accounts have very high interest rates.

Method 2: The Debt Avalanche Method

Sometimes referred to as debt stacking, the debt avalanche method dictates that you put your money towards the debt with the highest interest rate first, tackling debts by the amount of excess charges they’ll accumulate, regardless of debt size. 

Here's How it Works:

If you have a $20,000 car loan equal at 4% interest, a $40,000 student loan at 7% interest and a $1,000 credit card balance at 2%, you would put your money towards the student loan debt, then the car payment, then the credit card loan, in that order. The debt avalanche method is recommended for consumers with multiple outstanding high-interest accounts.

Because you pay down your debts according to interest rate instead of debt size, you’ll be left with the lowest-interest accounts last — meaning you’ll save more money over time. However, just like an avalanche takes some time to get started, it may take a few months of saving and putting money toward your debts to see progress.

If you’re the type of person who needs to see that “debt status: paid in full” email in your inbox to stay on track with your plan, you might want to choose the debt snowball method instead.  

Method 3: Debt Consolidation

For those struggling to keep up with multiple credit card payments and loans, debt consolidation is another option to consider. This approach enables borrowers to merge all their outstanding debts into a single loan, making it easier to manage and pay off their obligations.

Here's How it Works:

Debt consolidation involves taking out a single loan to pay off multiple debts. Debt consolidation loan typically has a lower interest rate, making it easier for the borrower to manage their payments and potentially save money in the long run. By consolidating debts into a single payment, individuals can simplify their financial obligations and create a streamlined debt repayment plan.

When you apply for a debt consolidation loan, you'll need to provide your lender with a detailed overview of your existing debts. This typically includes information about credit card balances, personal loans, or any other outstanding debts you may have. Once you've provided all the necessary details, the lender evaluates your financial situation to determine if you are eligible for a debt consolidation loan.

If approved, the lender will issue a loan amount that is sufficient to cover all your outstanding debts. With this loan, you will now have a single monthly payment to make, rather than dealing with multiple lenders and due dates.

Method 4: Debt Settlement

Why would a credit card company offer you a debt settlement? Credit card companies know that suing you for debt is an annoying and expensive process and bankruptcies will leave them with the hassle of liquidating your possessions (if you even have anything valuable to begin with). If you’ve recently dealt with a tough financial situation (like unexpected medical bills or a job loss), your creditors will be more likely to work with you.

Here's How it Works:

To negotiate the amount you owe, contact your credit card company and request to speak with a representative.

While many credit card companies will be willing to work with you to reduce the amount you owe, no creditor has a legal obligation to reduce your debts or even to negotiate a payment plan for you. If your creditor refuses to agree to a debt settlement, do not stop making payments on your debts in protest.

Your creditor can sue you for your debts in the event that you totally stop paying, or can sell your debt off to a debt collection agency. You should also be wary of for-profit companies that claim to negotiate debt on your behalf, especially if they request access to your savings account or request that you send payments directly to them instead of to your creditors.

Before you work with a debt settlement company, check out the Federal Trade Commission’s warnings on these predatory and opportunistic companies.

Method 5: Declaring Bankruptcy

If you’re drowning in debt and budgeting apps won’t make a dent in the amount you owe, you can consider tackling your debt once and for all by declaring bankruptcy.

Here's How it Works:

Bankruptcy is a type of legal status that can be issued if you have excessive debts; it clears your responsibility to pay. Bankruptcies are issued by court order and you’ll have to work with an attorney to file.

There are two main types of bankruptcy:

• Chapter 7 bankruptcy. The quickest and simplest type of bankruptcy, Chapter 7 will require you to surrender some of your property towards your debt. The remaining debt will be discharged. A Chapter 7 bankruptcy will show up on your credit report for ten years.
• Chapter 13 bankruptcy. Sometimes referred to as “wage earner’s bankruptcy,” a Chapter 13 bankruptcy allows you to keep your property in exchange for a court-ordered partial or full repayment plan. Under a Chapter 13 bankruptcy, the court will order your employer to garnish your wages, withholding a portion of your income to repay your debts. A Chapter 13 bankruptcy will remain viewable on your credit report for seven years.

Bankruptcy should be your last resort when it comes to clearing your debt. Bankruptcy will wipe away your debt quickly but at a very steep price — a bankruptcy is viewable on your credit report. A bankruptcy will wreak havoc on your credit score and will make it significantly more difficult for you to secure loans and even housing in the future.

Additionally, you may be barred from most federal jobs requiring security clearance for seven years following your bankruptcy. While it is not legal for your employer to fire you for declaring bankruptcy, it is legal for potential employers to request to run a credit check before offering you a job. This can make you a less appealing candidate for a number of jobs, especially if you work in the money management or finance industry.

Think long and hard before filing for bankruptcy.

It’s important to note that bankruptcy will not free you from all types of debt. Student loans are generally immune from bankruptcy and certain court-ordered debts and debts to the state (like child support payments and back taxes) can also be considered non-dischargeable. Bankruptcy is a long and expensive process, and it can cost you even more if you file incorrectly or inappropriately.

Consult with a bankruptcy lawyer well before you must file to help decide if filing for bankruptcy is really the right choice for you.

Final Thoughts

Paying off your debt requires a continuous commitment to paying more than the minimum required amount on your accounts. One of the most frequent reasons why consumers accumulate interest on their accounts is because they forget to make the minimum payment on their outstanding balances. Contact your credit issuers and inquire about setting up direct debits for balances that you won’t be paying in full any time soon.

Direct debits are a win-win for you and your creditors — you don’t have to worry about remembering payment due dates and they know that your account will be credited on time.

Frequently Asked Questions