How to get out of debt: 3 strategies that work

If you’re struggling to keep up with your bills, you’re not alone. Average American credit card debt was $5,221 in fall of 2021. According to the Federal Reserve Bank of New York, household debt in the U.S. increased by $266 billion in the first quarter of 2022.

Having a substantial amount of debt on your plate can make it difficult to juggle monthly expenses. And a high debt-to-income (DTI) ratio might prevent you from being able to qualify for major financial goals—like buying a house, financing a car or refinancing a student loan.

So you might be wondering: How can I pay off my debt? Thankfully, there’s more than one way to do it. Read on to learn about the different ways to pay off debt so you can pick the strategies that might work best for you.

Key takeaways

• Tracking monthly expenses and building a budget can help you determine how a debt repayment plan might fit into your financial situation.
• If you’re worried about not having enough money to pay off debt, it could be helpful to discuss your situation with a financial professional.
• The debt snowball method, debt avalanche method and debt consolidation method are three methods for getting out of debt.

Up next: meet a money mentor

Learn how Brandi hopes to make financial empowerment accessible at Detroit’s first Capital One Café.

Before you consider other ways to pay off debt, it might be helpful to create a budget. As the Consumer Financial Protection Bureau (CFPB) explains, “Making and sticking to a budget is a key step toward getting a handle on your debt.”

The CFPB recommends asking yourself these three questions to get started:

1. Where does my money come from? An hourly wage or annual salary may be only one of your sources of income. To get a complete picture of where your money comes from, you should also consider things like tips, bonuses, income from self-employment, investment income, support from family, government benefits and child support.
2. Where does my money go? Keeping track of your spending will help you see exactly where your money is going. You could even consider sorting your spending into different categories.
3. What bills do I have to pay, and when are they due? Keeping up with your bills and their due dates can be tough. Consider using a calendar to help you stay on top of things and plan ahead.

Once you start tracking your income, spending and bills, you can create your working budget. Then the CFPB recommends taking a look at your finances one month at a time. Next, analyze your spending habits and look for areas where you can cut back on expenses. Finally, you can set a goal so that you have something to work toward.

After budgeting and setting a clear financial goal, you can begin to consider different strategies for paying off your debt and which ones would work best for you.

If you’re looking to get out of debt, it might be wise to speak with a qualified financial expert before making any major decisions. When it comes to budgeting and debt repayment goals, a financial professional might be able to identify areas where you can save and help you create a more informed plan for paying off debt.

There are lots of different strategies to choose from when it comes to lowering the amount of debt you owe. But how will you know which debt payoff strategy is best for you?

Let’s take a closer look at three of the most commonly used methods for getting out of debt and what each entails.

The snowball method is suggested by the CFPB as one of two basic strategies for paying off debts.

With the snowball method, you continue making the minimum payments on all your debts and focus any extra money on paying off your smallest balance as soon as possible. Once you’ve paid that balance in full, you use the money you’ve freed up to pay off your next smallest balance—and so on. In other words, you create a “snowball” of payments as you pay off each balance. 

The snowball method could help you eliminate some debt faster. However, it’s important to keep in mind that paying off your smallest balances first could mean neglecting larger balances or debts with higher interest rates. Those debts could end up costing you more in the long run.

The highest interest rate method, also known as the debt avalanche method, is the other basic debt payoff strategy the CFPB suggests.

With the debt avalanche method, you continue making the minimum payments on your debts—just like you would with the snowball method—but you don’t focus on your smallest balances. Instead, you focus on paying off the balance with the highest interest rate as quickly as possible. Then you move on to the balance with the next highest interest rate. In other words, you create an “avalanche” of payments as you pay off debts. 

Progress may feel slow with the debt avalanche method because you won’t be paying off individual debts as quickly as you would with the snowball method. But the avalanche method can save you money in the long run since you’ll be paying off your most expensive debts sooner rather than later.

Debt consolidation is another debt payoff strategy you might consider, as it could help you simplify and lower your monthly payments.

Credit card debt consolidation, for example, allows you to combine several credit card balances and pay one monthly payment—either with a balance transfer or a loan. And you may be able to lower your payments if the credit card or loan has a lower APR than your current accounts have. 

Some credit cards even offer a 0% introductory APR for a limited time. But be sure to compare cards and check what the APR will be once the introductory rate expires, as it could be even higher than the rate you were paying before.

If you’re considering taking out a loan as a means of debt consolidation, it’s important to remember that not all personal loans are the same. Here are a few things to keep in mind:

• Most personal loans are unsecured. An unsecured loan doesn’t require collateral—an asset that a lender can take if you don’t repay the borrowed money. But lenders also might consider unsecured loans to be riskier than secured loans. And that means unsecured loans may have higher interest rates.
• Home equity loans and home equity lines of credit (HELOCs) can also be options for consolidating debt. But they can be risky because they use your home as collateral. If you can’t pay back the loan or HELOC, you could face foreclosure on your home.
• There are some types of loans you should generally avoid. Short-term, high-cost loans like payday loans can come with numerous costs and fees as well as extremely high interest rates. Payday loans are even illegal in some states.
• The CFPB warns that debt settlement companies can be risky. They usually charge expensive fees. And they typically encourage clients to stop paying bills altogether, which could result in late fees, penalties and a hit to your credit score. Debt settlement companies could even leave you in deeper debt than where you started.

Debt repayment strategies aren’t necessarily one size fits all. Always do your research to understand the short- and long-term impacts—especially as they pertain to the specific types of debt you’re looking to pay off—before choosing a strategy. 

It’s also helpful to know up front how much you’ll pay in fees and interest, whether the interest rate is fixed or variable and whether there’ll be a balloon payment down the road.

Becoming debt free requires consistency and patience. However, making efforts to get out of debt doesn’t always mean your other financial goals have to be put on hold. For more budgeting help, check out Capital One’s article on how to save money and still pay off debt.