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There are several smart options for paying off debt. The best way largely depends on how much you owe and how it compares to your income.
If your debt doesn’t consume a significant portion of your income, you might find success by tackling it on your own with the debt snowball or debt avalanche methods.
If your debt feels more overwhelming, consolidating high-interest debts like credit cards, can be the right move. You also could explore debt relief, if your debt is significant.
We explore each of these strategies below to help you make an informed decision.
First, calculate your debt load
The calculator below compares the amount you owe on key debt types with your gross annual income (that’s your total pay before any taxes or deductions).
This helps you determine whether you can use a do-it-yourself debt payoff strategy or if you should consider applying for a consolidation product, like a debt consolidation loan.
Smaller debt loads: Consider debt snowball or debt avalanche methods
If your debt accounts for less than 36% of your gross income, it may be smart to first consider a DIY approach, like the debt snowball or debt avalanche methods.
These methods don’t require you to take out additional credit or work with an outside agency or company — you can get started today. Here’s how they work.
Debt snowball
With the debt snowball strategy, you pay off your smallest balance first. Put as much money you can dedicate to debt payoff toward that account while continuing to pay the minimums on the other accounts.
When that debt is wiped out, add the amount you'd been paying on it to the minimum payment on the next largest debt. That way, the amount you’re paying on each debt keeps growing like a snowball getting larger as you roll it. Repeat this process until all your debts are paid off.
Debt avalanche
With the debt avalanche strategy, you pay off the debt with the highest interest rate first (while paying the minimums on the others), then move on to the account with the next highest rate and so on.
This might help you get out of debt faster and save you money over the long run by wiping out the costliest debt first. But depending on the balance, it might take a while to zero out that first debt. If quicker wins would motivate you, snowball may be a better method.
Larger debt loads: Consolidate high-interest debts
If you’re mostly struggling to stay on top of high-interest debts, like credit cards, then debt consolidation can be another smart strategy to consider.
Debt consolidation is when you combine multiple debts into one monthly payment, ideally with a lower interest rate. This saves you money and usually helps you get out of debt faster, since more money goes toward paying off the principal debt. Plus, it’s a lot easier to focus on making one payment versus juggling multiple balances with different due dates.
A balance transfer credit card and a debt consolidation loan are the two main ways to consolidate debt.
Balance transfer cards
A balance transfer card is a type of credit card onto which you roll your existing credit card balances. These cards typically come with a 0% promotional period (usually lasting 15 to 21 months), in which you pay zero interest. That means you can pay down the balance — in this case, the debts you’ve moved onto the card — with no additional interest.
You typically need good or excellent credit (any score in the mid-600s or higher) to qualify for a balance transfer card.
» COMPARE: Our picks for the top balance transfer cards
Debt consolidation loans
A debt consolidation loan is a type of personal loan you use to pay off all your debts in one go. You then pay back the loan with fixed interest over a set repayment term. Rates on debt consolidation loans range from 7% to 36%, and terms stretch up to seven years.
Debt consolidation loans are available even if you have bad credit, though it may be harder to qualify for a low rate. For a debt consolidation loan to make the most sense, you’ll want a rate that’s lower than your current debts
Overwhelming debt loads: Explore other debt relief options
Consider debt relief if paying off your unsecured debt, like credit card bills, personal loans and medical debt, isn’t possible within five years — or if your total amount of unsecured debt equals 50% or more of your gross income.
Debt management plans
Debt management plans are a type of debt relief program offered by nonprofit credit counseling agencies. Similar to the consolidation options listed above, these plans roll your debts into one payment at a reduced interest rate.
DMPs come with small startup and monthly fees, and there’s no credit score requirement to enroll. You can expect to pay off debt within three to five years with a debt management plan.
Debt settlement
Debt settlement involves negotiating with your creditors to reduce the amount you owe. You can try settling debt on your own by contacting your creditors directly or you can hire a third-party debt settlement company to do it for you.
Debt settlement typically hurts your credit score, since you’re ultimately paying less than you originally owed. Consider the options above before pursuing settlement.
Bankruptcy
Bankruptcy is a legal process that can help you “reset” if you can’t repay your debts. Chapter 7 and Chapter 13 are the two most common forms.
Chapter 7 erases most unsecured debts through liquidation, while Chapter 13 involves being placed on a court-approved repayment plan for three to five years.
Like debt settlement, filing for bankruptcy is a riskier debt relief option that can seriously damage your credit score.
» MORE: What to know about bankruptcy
How to put more money toward paying off debt
Regardless of the payoff method you choose, it’s essential you have the money to make regular payments on your debt. Here are some quick tips for maximizing cash flow.
Create a budget and stick to it
Getting clear on your budget can help you prioritize your spending.
- Choose a system that works for you: Though there’s no one-size-fits-all budgeting system, NerdWallet recommends the 50/30/20 budget, which proposes using 50% of your take-home pay for needs, 30% for wants and 20% for savings and paying off debt.
- Use technology to make things easier: Technology can make budgeting easier by letting you keep track of all of your financial accounts, categorize your expenses and automate your payments. There are several budget apps to help you stay on top of your money.
Find ways to lower your bills
Finding ways to reduce your monthly bills can help free up more money to put toward debt payoff. And every little bit counts.
Start by contacting your service providers and negotiate your bills for expenses such as your cell phone, car insurance, gym memberships and cable service. Switching providers might get you a better deal. Do your research to compare the rates of different companies.
Get a second job
If you have the ability, making more money even in the short term can boost your debt repayment plan.
Consider getting a part-time job, selling gently used or unused items or using your skills to do freelance work. A side hustle like house sitting, driving for Uber or Lyft or even dog walking can fuel your progress.
Don’t rule out the possibility of increasing your current salary. Research and preparation may help you negotiate more money at your current job.
