How to Pay Off Debt: 3 Strategies and 6 Tips

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The average American has $96,371 in debt, including student loan, mortgage and credit card balances. Whether your debt is more or less than this amount, it can seem difficult to manage.

Even if you’re struggling to reduce your outstanding balances and stay financially afloat, there are options to help you find relief. You can use the specific strategies described in this guide, such as the debt snowball or avalanche, or consolidate what you owe to break the chains of debt bondage.

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Strategies for Repaying Debt

It may have only taken a few months of unemployment or overspending to get into debt, but it will likely take longer to pay it off. It is important to commit to a plan and not be discouraged by setbacks. Remember that slow and steady wins the race to zero balance.

However you got into debt, you’ll need a plan to pay it off. Consider these strategies to get you started.

1. The debt snowball

The debt snowball method builds momentum as you begin to repay creditors, as if you were rolling a snowball across the floor. Start by paying off the debts from the smallest to the largest. List the debts by balance and start with the smallest. Be sure to pay the minimums on all other bills and send extra money to the debt with the smallest balance until it’s paid in full.

Repeat this strategy with other debts. As you pay down balances, you free up more funds for other debts. Plus, it’s encouraging to see progress and can keep you on track to see your debt disappear.

Who is it best for: The debt snowball is ideal if you want to make quick gains when you pay off your debts.

2. The avalanche of debt

The debt avalanche strategy takes a similar approach but instead ranks debt by interest rate. First, you list all your debts from highest to lowest interest rate. You then focus on paying off the highest debt while making minimum payments on all other debt. This reduces the amount you pay in interest, which also frees up more money to pay off other debts.

Who is it best for: The flood of debt is appropriate if saving a bunch of interest is a priority and you’re motivated to get out of debt quickly.

3. Debt consolidation

If it becomes too difficult to keep track of various payments and deadlines, consider debt consolidation. A personal loan or a new balance transfer credit card could be used for this purpose.

With debt consolidation, the lender pays off all your existing debts and converts them into a new loan in one payment. Although the new interest rate may be higher than some of your other bills, you could end up saving money by avoiding missed and late payment fees.

To determine if this is a smart strategy for your situation, you will need to calculate your blended interest rate. This is the combined interest rate paid on all your debts. It is calculated by adding the total interest you will pay in a year and dividing it by the total principal due. Or, you can use our debt consolidation calculator.

Even though the rate on a debt consolidation loan can be quite high, it could still be lower than the blended rate you are already paying, in which case a debt consolidation loan would be a good choice.

For whom it is best: Consider debt consolidation if you can commit to not using your credit cards or going into debt while you work to pay off what you owe.

4. Debt management plan

Non-profit credit counseling agencies can help set up a debt management plan with debtors. An agency will negotiate concessions on your behalf with companies to whom you owe money. This could involve arranging lower payments, putting reasonable repayment plans in place, and possibly getting debt forgiveness.

For whom it is best: Debt consolidation could be a viable option if you struggle to meet your minimum monthly payments and prefer a plan that can help you pay less interest and get out of debt faster.

Tips for Paying Off Debt

Once you have a debt repayment plan in place, follow these tips to stay on track.

1. Stick to a budget

Whatever strategy you choose to pay off your debts, you will need a budget. Otherwise, it is too easy to slip. With a budget, it’s easy to see where every dollar is going, which will help you identify areas where you could cut costs and save money.

Whether you use an app or a spreadsheet to create a budget, once you see all of your income and expenses, you can start planning how to pay off your debts. Subtract your fixed expenses from your income – that’s your free cash flow. This money is what you have to cover variable costs and pay off debt.

2. Open an emergency savings account

There’s nothing like an unexpected car repair ruining all your plans to get out of debt. Life will continue to unfold while you focus on paying off your debt, which is why you need an emergency savings account.

Even if you want to put every extra penny on your credit card balance, if you have

paid half of your balance, but can’t pay for an emergency, just top it up. Most experts advise having three to six months of living expenses in savings, so when setting your budget it should include a line item for savings.

3. Reduce monthly bills

If you’re wondering how to pay off debt and save money, consider ways to lower your monthly bills. Reducing monthly expenses frees up money that can be used to pay down debt.

Are there unnecessary expenses that can be cut? Maybe ditch Netflix or cable for a few months to save money and free up time for a side hustle. If heating bills have been out of control, many utility companies offer free energy audits, which would identify changes you could make to reduce utility costs.

4. Earn extra cash

Having a side hustle has almost become an American institution, right up there with apple pie. Many people now maximize their free time by making jewelry to sell on Etsy, driving for a rideshare, or babysitting their dog. The answer to “how do I pay off my debt?” could be brainstorming to earn some extra money.

What are your hobbies? Do you have any special skills that you could monetize? What side gigs would work with your daily schedule? Find a way to get extra cash and use those earnings to pay off your debts.

5. Explore debt relief options

Debt relief companies make big promises to help with issues such as how to pay off debt, but do they hold up? Yes and no. When you sign up to work with a debt relief company, they negotiate with your creditors to settle or attempt to change the terms of your debt. But there is a catch.

Debt relief companies charge fees for the services. To increase a creditor’s willingness to negotiate, the company can encourage its customers to stop paying their bills. But this will lead to late fees, interest charges, and other penalties that increase debt and hurt credit scores.

Companies can also help pay or manage some bills, but they could end up doing more harm than good. Explore all other options before deciding to work with one.

The bottom line

There are many different strategies and options for paying off your debts. Research the different approaches, including debt snowballing, debt avalanche, and debt consolidation to find a tactic that works best for you.

Once you’ve started, it’s important to set up a budget and an emergency savings account to make sure your debt doesn’t spiral out of control once again.

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