How To Pay Off Debt

Many people avoid taking the time to sit down and look their debt in the eye.

But oftentimes, the more you look at your debt and learn the strategies you can use to tackle it, the less intimidating it becomes. By starting your research, you've already cleared one of the biggest hurdles.

Below you'll find practical strategies to pay off your debt, ways to make extra money and what to do if you're seriously behind.

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Tips for Tackling Your Debt

The debt snowball and avalanche methods are some of the most popular ways to pay off your debt. Let’s take a closer look at how they’re done.

Snowball Method

The snowball method is a common strategy that focuses on eliminating your smallest balances first, so each debt you pay off puts more money toward the next one.

Step one of this method is to start writing down every debt you have, including credit cards, car payments and medical bills. Ignore the interest rates for now and sort your balances from smallest to largest. Your smallest balance is your first target.

Make minimum payments on everything else and throw every extra dollar at that smallest debt. When it's gone, take everything you were paying on it and roll it into the next smallest balance. 

Crossing off that first loan makes the whole process feel less daunting and builds momentum.›

Most people struggle to pay off their debt because it’s difficult to track and see progress. The snowball method helps you see quick progress.

Avalanche Method

The avalanche method takes a different approach. Instead of starting with your smallest balance, you start with the debt that carries the highest interest rate.

Make minimum payments on everything else and put every extra dollar toward that high-interest debt first. When it's gone, move to the next highest rate and repeat.

High interest rates are what make debt so expensive and difficult to escape. Knocking them out first stops the bleeding and saves you the most money over time.

But the tradeoff is patience. If your highest-interest debt also has a large balance, it can take a while before you get that first win. If you can stay the course, this method will cost you less in the long run.

Tips For Making Extra Money

The faster you pay down your debt, the less interest you pay. Even an extra $200 a month can shorten your payoff timeline and save you thousands in interest. And you don't need a second career to make that happen. Here are some realistic ways to find extra money.

• Sell things you don't need: Go through your house, and you’ll likely find something you can sell. Old electronics, clothes, kids' toys they've outgrown and furniture sitting in the garage. Facebook Marketplace and eBay can turn clutter into a debt payment faster than you'd think.

• Put windfalls straight toward debt: Tax refund, work bonus, birthday money. Before it disappears into everyday spending, send it straight to your target debt.

• Pick up extra work: There are tons of ways to pick up extra work like delivery driving, freelancing, tutoring, babysitting, walking other people’s dogs and the list goes on. A few extra hours a week can make a difference when every dollar goes straight to a balance.

A Few More Tips Worth Knowing

• Ask for a lower interest rate: Call your credit card company and just ask. If you've been a customer for a while and your payments are consistent, it works more often than you'd expect.

• Trim one recurring expense: A streaming subscription you forgot about, a gym membership you don't use. Redirect that money every month toward your debt instead.

• Look into a 0% balance transfer card: Some cards offer zero interest for up to 21 months on transferred balances. If you can move high-interest debt onto one and pay it down during that window, you could save significantly. Just have a plan to pay it off before the promotional period ends.

• Set up automatic payments: A missing payment can lead to late fees and penalty interest rates, which will only set you further back. Setting up automatic payments for at least the minimum amount across your loans and credit cards helps you stay on track and protects your credit score so you can focus on paying down balances.

What To Do If You’re Behind On Your Debt

If you've scrolled past the budgeting tips and the payoff strategies because your situation feels more urgent than that, this section is for you. Maybe you've missed payments. Maybe you’ve gotten letters in the mail.

Life happens, and here are your options for getting back on track. 

Hardship Programs

Before pursuing any formal debt relief option, it's worth calling your lender directly. Many banks and credit card companies offer hardship programs for borrowers going through financial difficulty, and most people never think to ask.

Depending on your situation and your lender, you may be able to temporarily lower your interest rate, reduce your minimum payment or even pause payments for a period of time. It won't erase what you owe, but it can buy you breathing room while you get back on your feet.

Just call the number on the back of your card or your loan statement and ask if any hardship options are available. The worst they can say is no.

Get a Credit Counselor

If you're not sure where to start, working with a nonprofit credit counselor is worth considering. They can review your finances, help you build a plan and negotiate directly with your creditors for you. These services can get your interest rates reduced and set up a debt management plan that makes your monthly payments more manageable. And many offer free initial consultations.

Keep in mind that credit counseling typically applies to unsecured debt like credit cards and personal loans, so it may not help with your mortgage, car loan or student loans.

Also, it’s important to keep in mind that there are a lot of predatory companies that advertise these services. Look for agencies accredited by the National Foundation for Credit Counseling and be wary of anyone who asks for large upfront fees or promises to fix your credit quickly.

Debt Settlement

Debt settlement may be worth exploring if your accounts are seriously past due and you're unable to keep up with payments. This process involves negotiating with your creditors to accept less than what you owe as a full payment. You can attempt this yourself or through a third-party settlement company.

If you go the third-party route, do your research first. Settlement companies charge between 15 and 20 percent of the total debt. They’re also known to advise you to stop making payments during negotiations as part of their strategy, which will hurt your credit score. Any forgiven debt may also be taxable, so it's worth talking to a tax professional before going this route.

For some people, though, it's a realistic path out of a situation that feels unmanageable.

Debt Consolidation

Debt consolidation combines multiple debts into a single loan. The consolidated loan is ideally at a lower interest rate than what you're currently paying. Instead of juggling several payments and due dates, you make one monthly payment. It won't reduce what you owe, but it can make repayment more manageable and slow down the damage that high interest rates do over time.

This option works best if you can qualify for a lower rate than what you're currently carrying. If you're considering a consolidation loan, MoneyLion can match you with personal loan offers up to $100,000 so you can compare rates and terms and find what works for your situation.

Bankruptcy

Bankruptcy is a legal process designed to give people a fresh start when there's no realistic path forward otherwise. This option is typically a last resort, but it's worth understanding if your debt has become truly unmanageable.

There are two common types of bankruptcy for individuals. Chapter 7 can discharge most unsecured debt relatively quickly. Chapter 13 allows you to restructure and repay over a period of three to five years while keeping your assets.

Bankruptcy can cause an initial drop in your credit score and stay on your credit report for up to 10 years. The process is also complex, so this is a decision worth making with a bankruptcy attorney.

Final Thoughts

Paying off debt gives you the freedom to set your finances toward other things most people would prefer, like family vacations or investments in your future.

If your goal is to pay off debt going forward, pick a method, make a call or look up one number. You don't have to solve all of it at once. But now you know where to start.

FAQs

How do I pay off debt fast on a low income?

Choose a payoff strategy like the snowball or avalanche method and direct every bit of extra income toward one debt until it’s gone.

What should I do about debt in collections?

If a debt goes to collections, confirm the details are correct and work with the agency to explore repayment or settlement options.

Which is better, the snowball or avalanche method?

Neither method is universally better, since snowball builds motivation through quick wins and avalanche reduces the interest you pay over time.

Will debt settlement hurt my credit score?

Yes, debt settlement may lower your credit score since accounts are usually reported as settled for less than the full amount.

Photo Credit: Getty Images/iStockphoto/Astarot

• Chapter 7 - Bankruptcy Basics. United States Courts.

• Chapter 13 - Bankruptcy Basics. United States Courts.