At a Glance

If you’re currently in debt-whether from credit card bills, mortgages, or student loans-you’re not alone. The current household national household debt is approximately $13.54 trillion.1

Debt can have a negative impact on your credit score and become increasingly higher over time due to interest payments. In this article, we’ll cover:

What is Debt?

Simply put, debt is money that you owe. Debt is a deferred payment, unlike other types of purchases that require payment up front. Examples of debt include car loans, home equity loans, and student loans.

Why Debt is Dangerous

Debt becomes dangerous when you continue borrowing without repaying your balance. Interest rates will continue to increase your debt, and the more time it takes you to pay it off, the more money you’ll owe.

Debt not only makes achieving your financial goals difficult, it negatively impacts both your future income and your credit score.

How Debt Hurts Your Credit Score

Credit ScoreSource: Myfico.com

Your account balance should comprise less than 30% of your credit limit. If your credit limit is $20,000, you don’t want your balance to be greater than $6,000. Debt can make your balance skyrocket, which will hurt your score.

In addition, if you amass too much debt and pay your credit card bill late or are unable to pay it, this will hurt your payment history and further impact your credit.

Types of Debt

There are two types of debt: revolving debt and installment debt.

  • Revolving debt: Revolving debt is the type of debt you accrue from credit cards, where you carry the amount you haven’t paid off from month to month. Interest rates can change, and you can borrow as much as your credit limit allows.
  • Installment debt: Installment debt comes from car loans, mortgages, etc. Though there are exceptions, the interest rate, payments, and amount borrowed are usually fixed.

If you pay either type of debt late or miss a payment, you’ll have to pay a late fee. It will also be reported to your credit bureau.

However, high revolving debt balances in comparison to your credit limit are what really ding your score. In this article, we’ll focus on the best strategies to help pay off your revolving debt.

Best Ways to Pay Off Debt

The best ways to pay off your debt include the following:

Avalanche Method

The debt avalanche method is a debt repayment strategy that focuses on paying the minimum amount of each account, and then using whatever money is left to pay off your debt, starting with the account that has the highest interest rate. Once that account is paid off, you move to the account with the next highest interest rate.

  • The good

Each account you fully pay off allows you to put more money toward the next account, since you’re eliminating the highest interest rates first.

  • The bad

By using the avalanche method, it may not feel like you’re getting anywhere. Cutting down interest expenses isn’t as satisfying as clearing a balance for good.

Snowball Method

The debt snowball method works by paying the minimum amount of each account and then using whatever money is left toward paying off the account with the smallest overall balance. Once the smallest account is paid off, you’ll work towards paying off the next smallest account, and so on.

  • The good

This method is very motivational since it encourages small wins early on in the debt repayment process.

  • The bad

The snowball method won’t save you as much money as the debt avalanche method since it doesn’t take into account interest rates. Taking longer to pay off high-interest debt will cost you more in the long run.

Figure out the best way to pay off your debt

Try our debt payoff calculator to see which plan is best suited for you.

Balance Transfers

Balance transfers help consolidate your debt and decrease your interest rates. With a balance transfer, you move your credit card balance to a new card with a lower interest rate. The new card is basically used to pay off the owed balance of your old card. While you may have to pay a balance transfer fee, in many cases the amount you can save with the lower interest rate is still greater than the fee.

  • The good

You save money on interest and consolidate your payments.

  • The bad

The lower interest rate of your new card isn’t permanent. For example, 0% introductory APR credit cards only offer that rate for a limited time.

Debt Consolidation Loan

A debt consolidation loan is a low-interest personal loan that’s taken out to pay off high-interest debt. Debt consolidation allows you to get out of debt quickly, leaving you with just the loan to pay off in monthly installments.

  • The good

A debt consolidation loan lets you consolidate multiple credit card balances into a single monthly payment with a low-interest rate. You can repay your debt quicker than if you tried paying off all your credit cards at once.

  • The bad

It’s possible that you may not get a better rate on your loan than what your credit cards currently charge. Again, make sure to read the fine print and compare the interest rates.

Other Debt Repayment Strategies

Other strategies to pay off revolving debt include:

Pay More Than Minimum

Try to pay more than your card’s minimum balance. It will help you pay off your balance faster and owe less interest.

Create Budget

Create a budget to help keep your spending under control. You could try following the 50/30/20 budget rule, in which you allot 50% of your budget to what you need, 30% to what you want, and 20% to your savings.2

Consider a Debt Management Plan

If your debt is continuing to rise and you feel overwhelmed, consider a debt management plan. Debt management plans, offered by credit counseling agencies, can help you pay back your unsecured debts by putting you on a repayment plan.

Lower Your Interest Rates

Lowering your interest rates can help you pay off debt quickly. Here are a few ideas

Get a Credit Card With a Lower Interest Rate

Depending on your credit rating, you may be eligible for a credit card with a better interest rate than your current card. This could even include a card with a 0% introductory interest rate.

Get a Balance Transfer Card with a Low or 0% Introductory Interest Rate

Another possibility is to get a balance transfer credit card with a lower interest rate or a 0% introductory APR. A balance transfer allows you to move debt from one credit card to another. You’ll still have the same amount of debt, but if you’re able to get a 0% introductory rate, your debt won’t increase as you work to pay it off.

Consolidate Debt With a Personal Loan

For those with a lot of debt at a high interest rate, one way to get out of debt is with debt consolidation through apersonal loan. Personal loans tend to have lower interest rates than credit cards. With a personal loan, it can be easier to track exactly how much you owe each month and how long it will take to pay off. Personal loans come with fixed interest rates, monthly payments and repayment periods.

Consolidate Student Loan Debt

If student loans are your biggest contributor to debt, there are resources that can help. Consider student loan consolidation or an income-based repayment plan. There also are certain situations that allow you to have your federal student loans forgiven, canceled, or discharged.