5 of the Methods Americans Use to Pay Down Debt

By Lindsay Frankel
Inside Subprime: July 29, 2020

If there’s one thing Americans have plenty of, it’s debt. We’re carrying a collective $4.2 trillion in non-housing debt, according to the most recent data from the Federal Reserve Bank of New York. Individual debt can range from healthy credit card spending to crushing debt from multiple sources that overwhelms households financially. 

Debt not only puts a strain on your income, but it also hinders your ability to access credit at affordable rates, especially if you’re spending with credit cards. Even if you make the minimum payments each month, a high credit utilization (using more than 30 percent of your available credit) will negatively impact your credit score. That means that if you have a lot of credit card debt, you might have trouble getting approved for a home or car loan, or you may be forced to pay much higher interest rates. 

Debt can pile up fast, especially high-interest debt. If you’re struggling with debt, it’s important to get ahead of the problem as soon as possible, before you owe even more in interest. There are a handful of ways to go about managing your debt. Any of these strategies can be helpful, so choose the one that works best for you. 

The Debt Avalanche Method

The debt avalanche method is the most efficient and least costly way to pay down debt. It involves prioritizing your highest interest debts so that you’ll pay less money in interest in the long run. Here’s how it works:

  1. List your debts in order of interest rate
  2. Divide up your income to cover the minimum payments on all your debts first
  3. Put any extra income towards the highest interest debt
  4. Once the first account is paid off, devote any extra payments towards the next debt on the list

Each time you finish paying off an account, you’ll have more money to put towards your other debts. The avalanche method can feel slow before it picks up speed, which is overwhelming to some people. You might not feel like you’re making much progress at first, but is mathematically the fastest (and cheapest) way to pay off debt. Still, the debt snowball method may be more motivating for some people. 

The Debt Snowball Method

The debt snowball method involves prioritizing your smallest debts first. It’s the quickest way to reduce the number of accounts you have in debt, but it will cost more in the long run than the debt avalanche method. Here’s how it works:

  1. List your debts in order of amount, from smallest to greatest
  2. Divide up your income to cover the minimum payments on all your debts first
  3. Put any extra income towards the smallest debt
  4. Once the first account is paid off, devote any extra payments towards the next debt on the list

Because you’ll be able to eliminate an account fastest with this method, you’ll start to see your success quickly. It can be motivating to see you’re making progress. While the debt snowball method isn’t as efficient as the debt avalanche method, the strategy still works well. If you think you’re more likely to stick with this method, it’s probably a good choice to get you out of debt. 

Balance Transfer

A balance transfer can earn you a huge break on interest, and can be helpful on its own or in combination with one of the strategies above. It will effectively cut the interest rate on one of your debts to 0 percent, but you’ll likely need good credit to qualify. Many credit card issuers offer a 0 percent introductory APR that lasts anywhere from six to 18 months. Some cards charge a balance transfer fee, however, so be sure that this will be offset by the interest savings. 

Taking advantage of a balance transfer offer can save you a significant chunk of change. For example, if you have a $10,000 credit card balance on a card with 18 percent APR, and you transfer that balance to a card with no interest for 18 months while you pay it off, you’ll save $1,371 in interest charges. Just make sure that you’re not tempted to spend more with your new card; a tight budget is key to paying down debt faster. 

Debt Consolidation

Another way you can save money on interest is by taking out a personal loan (provided you can get one with a low interest rate) and using that cash to pay off higher-interest debts immediately. The benefit of this strategy is that you’ll only have one monthly payment to worry about, so it’s a good idea to consider if you struggle to stay on top of when your payments are due. But you need to make sure that the personal loan you qualify for has a lower interest rate than your existing debts. 

This will likely be the case if you have good credit; the average interest rate for all credit card accounts is 14.5 percent, while the average interest rate on a 2-year personal loan is just 9.5 percent. Using these figures, you’d save $504 by consolidating $10,000 in credit card debt with a 2-year personal loan. 

Debt Settlement

If you already have past-due payments but have a sum of money you’re able to put towards your debt at once, you may be able to settle your debt for less than you owe. You can either negotiate with the lender or creditor yourself, or you can get help from a debt settlement agency. Many of these programs require that you make payments into a savings account until your debt is settled, so you should check to make sure the program fits with your budget before agreeing to enroll. You should also be aware that your credit could take a hit during the process, as you’ll likely stop making payments to creditors directly. 

You should also beware of debt settlement scams. Never give money to an agency upfront for settling your debts, and beware any business advertising a “new government program” for personal debt relief. If the company makes guarantees that sound too good to be true, you’re probably looking at a scam.

To learn more about tackling debt, check out the OppLoans Guide to Boosting Credit While Paying Down Debt.

For more information on the middle income consumer, subprime loans and payday loans, see our city and state financial guides including states and cities like California, Texas, Illinois and more.