Takeaways
- Paying off debt requires taking an inventory of your outstanding debts.
- High-impact strategies include the snowball and avalanche methods.
- High annual percentage rates (APRs) can prolong your debt-free journey.
- Outstanding credit balances can balloon with compounding interest.
- Becoming debt-free usually involves earning more income, creating a budget, and selecting the best debt repayment approach.
Paying off debt can feel all-consuming, especially if your debt levels are high relative to your income. The best way to pay off debt depends on what strategy you feel most comfortable using and what your budget allows.
Small debt balances can be paid off in months, while larger balances might require years of dedicated focus. Becoming debt-free requires financial planning, budgeting, and using all available tools.
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What Is Consumer Debt?
Consumer debt is any loan, credit line, or credit product where you own money from a bank, credit union, or other financial institution. These products charge you interest for the right to borrow money now and pay off the balance later.
Annual Percentage Rate (APR) varies tremendously among debt products. Credit cards tend to have the highest APR applied to borrowed funds, while mortgages or installment loans charge a much lower rate.
Using credit products can be a slippery slope. But when managed correctly, you can use them to your advantage. Here are some credit products that, without proper planning and budgeting, could cause issues with your personal finances.
Read More: What Are The 5 C’s of Credit?
7 Must Know Credit Products
- Credit Cards: These payment cards allow you to pay for everyday items, like coffee, groceries, or gas, quickly. When used to your advantage, they can help improve your credit score.
- Student Loans: Thousands of graduates of trade schools, universities, and graduate programs graduate with massive amounts of student loans. While these loans help people pay for higher education, they can be difficult to pay off.
- Personal Loans: Whether upgrading your house or funding a vacation, personal loans can be flexible debt tools. They issue you a lump sum, say $10,000, which you pay back over time. Read out our Personal Loans 101 Guide.
- Mortgages: Rising home prices have made paying for a home with cash virtually impossible. Most new homeowners take out a mortgage from a bank to finance their purchase. While these loans have a lower APR, they have 10, 15, or 30-year terms. Read more about how to save for a down payment.
- Car Loans: New and used cars can be pretty expensive. Many buyers apply for an auto loan to help fund a new car purchase. These loans cover the purchase price, and you pay back the remaining balance with interest.
- Installment Loans: If you need to make a large purchase, consider an installment loan. They are usually used for more expensive purchases. Read more about how installment loans work.
- Personal Lines of Credit: You can take out a personal line of credit with a bank if you need access to a revolving line of credit. You can tap into your line of credit whenever you need funds.
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5 Steps to Assess Your Debt
Here are the five steps you need to take to get a grip on your outstanding balances:
1. Gather Your Debts
With such an inventory of credit products, you might already have multiple outstanding balances. For example, you could have a couple of credit cards and student loans.
You must conduct an inventory of your debts and assess your current debt load. Then, you can list everything that is unpaid.
2. Rank Your Debts
Once you have listed your debts, the next smart money move is to rank them in descending order (highest amount first). Next to each debt, you should list its APR.
Calculate the monthly minimum balances you need to pay each month. This will keep your debts in check while you formulate your plan of attack.
3. Assess Your Income
The next order of business is to look at your sources of income. If you have already started your career, you probably have a good idea of what your monthly paycheck looks like.
Remember to include other income streams. You might have a side hustle or freelance work to supplement your monthly income.
4. Build a Budget
If you don’t already have a budget, now is the perfect time to choose a budgeting strategy that works for you. Creating a budget will allow you to assess how much of your discretionary income can go toward paying off your debt.
Personal finance experts advocate for selecting a budgeting system, like the 50/30/20 budget, that spells out precisely what percentage of your income you should spend to pay off debt.
5. Calculate Your Debt-Free Timeline
The final step is to calculate how long it will take you to become debt-free. Now that you know your total monthly income, minimum debt payments, and how much you must spend on debt payments each month, you can calculate how long it will take you to become debt-free.
For example, if you have an outstanding balance of $10,000 in credit cards and car loan payments. Based on your budget, you also calculate that you can spend $500 monthly on debt payments. In this case, it will take roughly 20 months to become debt-free (don’t forget about compounding interest).
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Strategies to Pay Off Debt
- Snowball Method: The debt snowball method advocates paying off your credit card balances with the smallest amount first. Because you already listed out your balances earlier, all you have to do is sort your list to see which debt balances are the smallest.
Research shows that the snowball method increases your chances of becoming completely debt-free.[1]
- Avalanche Method: On the other hand, the debt avalanche method focuses on the highest cost of debt first. Here, you rank your debts by the highest APY, regardless of balance.
With the avalanche method, you can start paying off your credit cards and working your way down to your mortgage. Technically, the avalanche method is the most economical way to pay off debt.
The downside to this method is that some people get deterred when they don’t see small wins (like paying off a credit card balance in full) along their debt repayment journey.
- Debt-to-Income (DTI): Not all debt is bad. However, when you have too much debt relative to your income, it can be challenging to pay off debt. You can keep your debt levels in line by following the 30% Rule.
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What Is Debt Consolidation?
Debt consolidation is the process of lumping two or more credit products with different APRs into one new product with a new APR. Many people find debt consolidation attractive because it streamlines the debt payment process. With debt consolidation, you only have to manage one payment.
Depending on your financial situation, debt consolidation might be the right path for you. However, consolidating your debt can have profound implications, so make sure you read the fine print. The last thing you want to do is trade one credit product for another.
How to Accelerate Paying Off Your Debt
1. Build a Budget: Getting your personal finances in order is one of the fastest ways to accelerate paying off debt. Creating a budget puts a magnifying glass on your expenses, income, and financial goals.
2. Trim Your Bills: Recurring expenses like subscriptions can slowly drain your wallet. Review your bank account and credit card statements to see what forgotten or unused subscriptions need to be cut or paused. This will free up money to pay your debts.
3. Earn More Money: Making more money only helps pay off debt if you apply your extra earnings towards your outstanding debt. Starting a side hustle or freelance work can give you the much-needed funds to maintain your lifestyle and boost your debt repayment. (Read more about 10 Popular Freelance Jobs).
4. Sell Used Items: Unless you have already adopted a hyper-minimalist approach, you probably have valuable used items lying around your home or apartment. Liquidating anything from used electronics, clothes, jewelry, or furniture could provide cash to pay down debt.
5. Actively Manage Your Debt: If left unattended, consumer debt can balloon out of control. You can become debt-free by actively managing your debt—knowing your outstanding balances and APRs and having a debt repayment plan.
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What Is Debt Relief?
Debt relief can be extremely helpful if your debt-to-income ratio is well over 40% to 50% or your debt timeline is multiple years. If you have tried all the conventional ways of shedding unsecured debt – like credit cards or personal loans – without success, debt relief might be your answer.
Here are several debt relief strategies to consider:
- Bankruptcy: Chapter 7 or 11 bankruptcies allow individuals to reorganize their finances and even liquidate assets to settle debts. Bankruptcy proceedings can impact your credit report and score for years.
- Debt Settlement: Depending on your creditors, you can negotiate to reduce your APR or outstanding balance. Debt settlements allow you to reduce your repayment timeline and shed outstanding debt. You can do this yourself or hire a debt settlement company.
- Debt Management: Your overall strategy for becoming debt-free is your debt management plan. This plan can involve exploring debt settlement and bankruptcy and creating a debt-free timeline.
Smart Summary
Paying off debt takes consistent effort. You can accelerate your debt repayment by reducing your debt use (put those credit cards away) and putting more of your monthly budget toward debt repayment. If you pay off debt, it will increase your net worth, and you can move on to saving an emergency fund, buying your first stock, and saving for retirement.
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(1) Northwestern Kellogg. The ‘snowball approach’ to debt. Last Accessed March 20, 2025
