If your debt is keeping you up at night, you’re not alone. According to a recent NerdWallet survey, almost half of Americans (46%) say they regularly stress about their debt balance.
But 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:
- For smaller debt loads, you can tackle debts on your own with the debt snowball or debt avalanche methods.
- For medium debt loads, you can consolidate high-interest debts to help free up cash.
- For large debt loads, debt relief may offer a much-needed way out.
We explore each of these strategies below to help you make an informed decision.
But first, let’s calculate your debt load
So how do you figure out whether you have a small, medium or large amount of debt?
The calculator below compares the amount you owe with your gross annual income (that’s the amount of money you make each year before taxes or deductions).
This gives you a percentage, which is your debt-to-income ratio. Keep this percentage in mind as you read more. It will help 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.
Small debt loads (under 36%): Consider the debt snowball or debt avalanche methods
If your debt accounts for less than 36% of your gross income, it’s 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 as you can 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 smallest 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 snowball example
You have three credit cards with the following balances and annual percentage rates:
- $1,500 at 20% APR
- $4,000 at 28% APR
- $6,500 at 24% APR
You put whatever money you can toward the $1,500 card, which is the smallest balance, and pay only the minimums on the other two. Once the first card is paid off, you roll its payment into paying off the $4,000 card, and eventually, the $6,500 card.
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.
Debt avalanche example
You have three credit cards with the following balances and annual percentage rates:
- $4,000 at 28% APR
- $6,500 at 24% APR
- $1,500 at 20% APR
You target the $4,000 card first because it has the highest rate (28%). Then you move to the $6,500 card (24%) and finally the $1,500 card (20%).
Medium debt loads (between 36% and 49%): Consolidate high-interest debts
If your debt is starting to pile up, high interest rates are likely the culprit.
Debt consolidation reduces the interest you’re paying by combining multiple debts into one monthly payment under a lower 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 (a 690 credit score or higher) to qualify for a balance transfer card. You’ll also pay a balance transfer fee, which is usually 3% to 5% of the amount transferred.
Balance transfer card example
You have $12,000 spread across three credit cards with APRs between 20% and 28%.
You move all this debt to a balance transfer card with an 18-month 0% APR offer. This requires paying a 3% balance transfer fee of $360.
Your new balance is $12,360. To clear it before the promo ends, you'd pay about $687 a month.
» 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 6% 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.
Debt consolidation loan example
You have $12,000 spread across three credit cards with APRs between 20% and 28%.
You take out a $12,000 loan at 17% APR with a three-year term to pay them all off at once. Your payment on the loan is about $428 a month. You’d pay about $3,402 in interest.
Large debt loads (50% or more): Explore debt relief
Consider debt relief if your total unsecured debt, like credit card bills, personal loans and medical debt, equals 50% or more of your gross income. Three paths toward debt relief are debt management plans, debt settlement and bankruptcy.
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. However, you’ll need to permanently close any credit cards you enroll in the plan.
DMPs come with small startup and monthly fees, and there’s no credit score requirement. You can expect to pay off debt within three to five years with a debt management plan.
Debt management plan example
You owe $20,000 across several cards at an average APR of 28%.
A credit counseling agency negotiates your rate down to 8% and sets up a four-year plan.
You pay about $488 a month, plus a fee of $30 a month. Over the plan, you'd pay about $3,440 in interest and roughly $1,440 in monthly fees.
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. The company will instruct you to stop making payments on your debts, so you can save for a settlement offer.
Debt settlement majorly hurts your credit score, and your creditors may even sue you. Consider the options above before pursuing settlement.
Debt settlement example
You enroll $20,000 of credit card debt with a settlement company. You stop paying your card balances and save money in a dedicated account.
Eventually, the company settles your debts for $11,000. The company's fee is 20% of the enrolled debt ($4,000), so you pay $15,000 in total.
Bankruptcy
Bankruptcy is a legal process that can help you “reset” if you can’t repay your debts at all. 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 to 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.
You can also audit your monthly subscriptions and cancel anything you don’t use.
Earn extra income
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.
