Ways to Pay Off Debt

Learn about debt payoff strategies to help plan for the future


If you’re struggling to keep up with your bills, you’re not alone. According to the Federal Reserve Bank of New York, household debt in the U.S. increased by $155 billion in the first quarter of 2020. And that number is expected to climb as the COVID-19 pandemic wears on.

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.

Debt Payoff Strategies

There are lots of different strategies for paying off debt. But how will you know which debt payoff strategy is best for you?

Picking a strategy can be less daunting when you start with some basics. And you should consider speaking with a qualified financial expert. They can help you choose the strategy that’s best for you.

Budgeting

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 towards 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 goal, you can consider different strategies for paying off your debt. 

Snowball Debt Payoff Plan

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

With the snowball method, you continue making the minimum payments on all of 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 work for you if you like to make quick progress on the number of debts you owe. But keep in mind: Since the snowball method focuses on paying off your smallest balances first, it could mean neglecting larger balances or debts with higher interest rates. And that means those debts could cost you more in the long run.

Debt Avalanche Method

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. That’s 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

Debt consolidation is another debt payoff strategy you might consider. It could help you simplify and lower payments—especially if you’re making payments on multiple credit cards each month.

Credit card debt consolidation 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 check what the APR will be once the introductory rate expires. It could be even higher than the rate you were paying before.

If you’re considering a loan, 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.
  • 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.
  • Home equity loans and home equity lines of credit (HELOCs) are also risky options for consolidating debt. That’s because they use your home as collateral. If you can’t pay back the loan or HELOC, you could face foreclosure on your home.
  • 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.

Consider Your Options Before Paying Off Debt

Debt repayment strategies aren’t necessarily one-size-fits-all. Always do your research to understand the short- and long-term impacts before choosing a strategy. And know upfront how much you’ll pay in fees and interest, whether the interest rate is fixed or variable, and whether you’ll have a balloon payment down the road.

You should also consider speaking with a qualified financial expert or contacting a nonprofit credit counseling organization for help.


Learn more about Capital One’s response to COVID-19 and resources available to customers. For information about COVID-19, head over to the Centers for Disease Control and Prevention

Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

Related Content