Choose the Debt Payoff Strategy That’s Right for You

Understand four common methods that could get you to financial freedom

Young woman looks through her mail at a mailbox
•••

The Good Brigade / Getty Images

To effectively pay off your debts, you can prioritize them and figure out how much to pay each month with a good strategy.

The debt snowball and debt avalanche methods are two popular debt payoff tactics, but they're not the only ones. Here, we'll review a few common strategies to help you explore which may be best for you. To find your best debt reduction strategy, consider your preference for saving money on interest, the amount you can pay each month, and your need for motivation.

Debt Snowball

With the snowball method, you pay your debts off from smallest to largest amount due, regardless of interest rate or other account factors.

This technique allows you to pay off small debts quickly, making more progress toward catching up with accounts. Once you pay off one account, roll over that monthly payment to the next account while continuing minimum payments on your other debts. Repeat the process until all your accounts are paid off.

With the debt snowball method, you’d arrange your debts priorities from lowest to highest, like with this:

Balance APR
$850 22%
$1,400 18%
$3,600 24%
$5,325 14%

You’d start your debt payoff by paying as much as you can toward the $850 credit card balance since it's the lowest while paying just the minimum due on the remaining accounts.

Debt Avalanche

With the debt avalanche method, you start by paying off your debt with the highest interest rate, regardless of the total balance or monthly payment.

Similar to the debt snowball method, you focus on paying off one debt at a time. First, you make sure you pay the minimum payments on all your accounts. Then, you’d contribute any extra money as one lump sum to one account until you pay off the highest-interest card. After that, you’d focus on the debt with the second-highest interest rate.

Under the debt avalanche method, here’s how you’d pay off the same balances listed before:

Balance APR
$3,600 24%
$850 22%
$1,400 18%
$5,325 14%

With the avalanche method, rank your debt by interest rate, from highest to lowest. Under this plan, you'd start by paying off the balance with the 24% APR while making the minimum payments on the remaining accounts.

Debt Consolidation

Consolidating your debts allows you to combine multiple debts into a single balance so you can pay your total debts off with one payment. If you primarily have credit card debt—or balances that can be paid off with a credit card—you can transfer all the balances to one balance transfer credit card, then focus on paying down your larger credit card balance.

Combining debts with a debt consolidation loan is another option for merging multiple credit card balances. This type of personal loan is used to pay off debt balances. You can also pay a debt consolidation company to oversee the process for you, but you can save money by consolidating debts yourself.

Debt consolidation may allow you to save money on interest if you consolidate with a low-interest-rate loan. You may also be able to pay your debt off faster, depending on your monthly payment.

Once you've consolidated your debt, you'll open up your available credit on your credit cards again. Be careful not to use your credit cards while you're paying off your consolidation loan or you will only increase your debt.

Debt Management Plan

If you're having a hard time paying your bills, repaying your debts under a debt management plan (DMP) can give you a break on interest and the monthly payment amount. A DMP is a payment agreement with your credit card issuers, typically of three to five years, and is arranged by a consumer credit counseling agency.

Once your plan is approved, you'll make one payment each month to the credit counseling agency, which will divide your payments and send them to your credit card issuers.

You won't be able to use your credit cards while you're on a DMP.

Which Method Is Right for You?

The method you choose for paying back your debts is a critical decision, Jill Gianola, owner of Gianola Financial Planning, LLC told The Balance in an email. She considers it a key factor in her clients' success in repaying their debts.

Save on Interest

The debt avalanche method saves money in the long run because you’re getting rid of your more expensive debts first. On the other hand, large high-interest rate debts can take awhile to pay off, so you may not get the emotional satisfaction of clearing a whole credit card balance as quickly as you would with other methods.

The debt avalanche method may be good for you if you're disciplined, keep good records, and have a reliable monthly income, said Gianola, who also co-authored Single Women and Money: How To Live Well on Your Income.

Staying Motivated

For many people, the debt snowball method feels more rewarding, especially in the beginning, because you can quickly cross off smaller debts as you pay them off. Despite being more expensive in terms of interest costs, Gianola recommends the debt snowball method for people who need to see progress to stick with their plan.

"Even though they may end up paying more interest on their loans, these clients are more likely to stay on track with the snowball method," said Gianola.

We’ve created a Google Sheets spreadsheet (The Balance Credit Card Debt Worksheet) to help you collect your credit card details—and to help you do the math. In addition to summing up debt totals for any cards added to the list, the spreadsheet also calculates your credit utilization ratio, an important factor in credit scoring. You can use the worksheet to help you decide which debt to focus on first.

Large Debt Balances

Debt consolidation may be right for you if you're overwhelmed by the hassle of making multiple payments for your debts each month, and also if your credit score is high enough that you're able to secure a loan or card with a lower interest rate than what you're paying on existing debts.

But paid debt consolidation services should be approached with caution. The industry has been a target for scammers, Jim Pendergast told The Balance in an email. Pendergast is senior vice president of altLINE, a division of The Southern Bank Company. If you decide to use one of these services, look for legitimate businesses with references.

Affordable Payments

Consider a debt management plan through a credit counseling agency if you're having trouble making your minimum monthly payments.

Credit counselors can work with your creditors to lower your payments so that they're more affordable. Gianola cautions against using other types of debt relief companies, which may charge fees that can get you deeper into debt.

Below, you’ll find a summary of the four repayment strategies we’ve discussed.

Debt Avalanche Debt Snowball Debt Consolidation Debt Management Plan
Repayment Strategy Pay debts one at a time, starting with the highest interest rate  Pay debts one at a time, starting with the lowest balance Pay debts that have been combined into a single balance Pay debts through a credit counseling agency
What’s Required of You Multiple monthly payments, one for each balance Multiple monthly payments, one for each balance One monthly payment toward the consolidated balance One monthly payment to the credit counseling agency, assuming all debts are included in the plan
Advantages Saves money on interest costs by getting rid of expensive debts first Motivates by eliminating small debts quickly Simplifies debt repayment by combining into one balance, often with a lower APR Creates an affordable and manageable debt plan, often with a lower APR
Potential Downfalls Large debts can take longer to pay Potentially more expensive Low credit score may limit attractive consolidation options Credit cards are off-limits during the plan

The Bottom Line

Ultimately, the best debt payoff strategy for you will depend on your own financial situation.

Now that you better understand the pros and cons of these four main repayment techniques, think about which one will best fit your circumstances and your personality. Whether you prioritize saving or you want a motivational boost, choosing a plan that will work for you can lead to success with your personal financial goals.

Article Sources

  1. Consumer Financial Protection Bureau. “How To Reduce Your Debt.” Accessed Dec. 16, 2021.

  2. National Foundation for Credit Counseling. “Debt Management Plans.” Accessed Dec. 16, 2021.