Debt comes in many shapes and sizes. Sometimes you take on debt purposely, other times it slowly creeps up on you or hits you all at once. While there’s no “right way” to reduce debt, one or more of these four strategies could work for you.
Strategies to get out of debt | Strategy overview |
|---|---|
Snowball strategy | Pay minimum balances on all debts and apply remaining funds to your smallest debt first. Once paid off, roll those funds into the next lowest debt. |
Avalanche strategy | Pay minimum balances on all debts and apply remaining funds to debt with the highest-interest first. Once paid off, roll those funds into the next highest-interest debt. |
Debt consolidation | Combine debts into one manageable payment. |
Debt management | Get help if debt becomes overwhelming. |
The impact of debt on your finances
Interest charges can make debt expensive, essentially taking money from your future paychecks and making it harder to save for your goals. Taking on more debt will likely increase your debt-to-income ratio, making it tougher to qualify for loans you may need, such as a mortgage. Additionally, if debt begins to negatively impact your credit score, loans you do qualify for may come with higher interest rates. Everyone's financial situation is unique - finding the right balance of saving while still chipping away at debt is key – how you do that depends on what process works best for you.
Read more: How to use spending and saving buckets to pay down debt
4 strategies to pay off debt
Having a debt-reduction plan in place can help you stay on top of payments so you can crush your goal of becoming debt free.
1. Snowball strategy
With the snowball method, list your debts in order by amount. Every month, make all your minimum payments, then put any remaining funds in your budget toward your smallest balance. As each debt gets crossed off the list, those funds now go toward paying off the next lowest debt.
Pros of the snowball strategy | Cons of the snowball strategy |
|---|---|
Simple to start using | May cost you more if your highest balance also has high interest |
Small wins can boost your motivation and keep you going | Because you're not prioritizing high-interest loans, it can take longer to eliminate all your debt |
2. Avalanche strategy
In the avalanche strategy, you pay the minimum balances on each debt and put any extra income toward the balance with the highest interest rate. Once that’s paid off, you’ll direct those payments to the balance with the next highest interest rate, and so on.
Pros of the avalanche strategy | Cons of the avalanche strategy |
|---|---|
Saves money on interest | May need extra money to put toward debt |
Structured approach to paying off debt | Could be difficult to stay motivated because it may take a while to fully pay off the first balance |
3. Combine multiple debts into one payment (debt consolidation)
It’s tricky to manage debt from multiple sources with varying rates. Consolidating debts into one monthly payment can help. You may be able to do this with a credit card balance transfer or a debt consolidation personal loan. By doing so, you’ll not only have to manage just one payment, but you may be able to reduce your interest rate, too.
Pros of debt consolidation | Cons of debt consolidation |
|---|---|
Simplifies debt because you will only have one monthly payment | May face high up-front fees |
Could secure a lower interest rate | Could come with a higher interest rate than what you currently pay on your debts |
On-time payments could increase your credit score | Need to be eligible |
4. Work with a counselor on a debt repayment plan (debt management)
If debt becomes unmanageable, a professional credit counselor or a debt consolidation company may help. A debt relief program may help you negotiate more time or better rates, manage or consolidate your debts or pursue debt settlement.
Pros of debt management | Cons of debt management |
|---|---|
Simplifies debt because you will only have one monthly payment | Creditors may not agree |
Could secure a lower interest rate | May be required to close one or more credit accounts |
Can get advice from a professional | Could hurt your credit |
Tips for staying debt-free
To keep your accounts in the green going forward:
Build a savings safety net
Pay credit card balances on time and in full
Stick to a budget
Keep sources of debt to a minimum
You may also consider creating spending buckets, a feature of an Ally Bank Spending Account, to make it easy to track where your money is going and to see how much you have left over.
Repay and relax
Reducing debt may feel like an uphill battle. With persistence and an eye on your target, you’ll see the debt you once viewed as a mountain turn into a molehill.
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