You Might Be Using the Wrong Strategy to Pay Down Your Debt

Struggling to pay down your debt? You’re not alone: Despite increasing growth in income, delinquent balances continue to worsen year over year, according to the Federal Reserve Bank of Philadelphia.

Part of the challenge is just getting started. When you're making minimum payments that don't put a dent in your overall balance — or worse, getting swallowed up by interest and late fees — it's hard to find any motivation to actually figure out how to pay off credit card debt for good.

“The clients that come to see us — they’re feeling stuck,” says Tara Unverzagt, senior financial planner at South Bay Financial Partners.

But finding the right strategy, be it a do-it-yourself (DIY) method to prioritize expensive debt or a plan managed by a debt relief company, can make it easier to climb out of the hole. Read on to learn when different debt payoff strategies work best and find out if you should switch methods.

What are the different types of debt payoff strategy?

Debt payoff strategies can be roughly categorized in two fields: DIY and managed solutions.

With DIY solutions, you are solely responsible for developing a plan and its outcome, although credit counseling — which offers some services for free — may be able to help you with the logistics. Managed solutions have added fees and costs, but you get to skip some of the leg work.

• DIY debt payoff: Based on budgeting alongside methods like the debt snowball and the debt avalanche, which focus on paying off the smallest and highest-interest debts first, respectively.
• Debt consolidation: A middle ground that combines multiple debts into one through a consolidation loan or a balance transfer credit card. There is little oversight from third-parties, which requires you to be on top of your regularly scheduled payments.
• Debt management plans: These are structured repayment plans coordinated by a credit counseling agency.
• Debt relief: Also called debt settlement, this is the process of negotiating with creditors to reduce the total amount owed. You can pursue this on your own, though many borrowers choose to work with credit card debt relief companies.
• Bankruptcy: A legal process that eliminates or restructures debt when no other options are viable. This should only be considered as a last resort if you’re drowning in debt.

You should consider a DIY payoff strategy if…

You have manageable debt and can make consistent payments

Do-it-yourself strategies for managing debt (like the debt snowball and avalanche methods) keep you in control without taking on a new loan or the risk of damaging your credit. This is ideal if your total debt is not overwhelming and you have enough income to cover monthly payments without struggling.

Your interest rates are not excessively high

If your current debt has low enough interest rates, you can focus on aggressively paying down your balances without the need for restructuring. Instead of taking out a consolidation loan to combine multiple debts that are under 10%, you might be better off using a DIY strategy to pay them off individually, saving on any applicable fees from the loan origination process.

Debt avalanche vs debt snowball

If a DIY strategy makes sense for you, you'll also need to choose a payment schedule to follow.

One option is the debt snowball strategy, a payoff method that focuses on building motivation by paying off debts from the smallest balance to the largest, regardless of interest rates. In contrast, a debt avalanche is meant to save you the most money in the long run by targeting debts with the highest interest rates first.

While the debt avalanche leads to paying less interest over time, it can take longer to see progress. Eliminating smaller debts first makes you experience quick wins, which can create momentum and reinforce positive financial habits.

You should consider debt consolidation if…

You struggle to keep up with multiple bills

Juggling multiple due dates and balances can be stressful. Debt consolidation, where you roll multiple balances into a single, new loan, can make it easier to manage. You can do this with a personal loan, home equity loan or even a balance transfer credit card.

Ideally you’ll get, “lower interest rates, a fixed payment schedule and simplified payments,” says Raeonna Jefferson, an associate planner with Zenith Wealth Partners.

You have a strong credit score

Debt consolidation works best when you can secure a lower interest rate than your existing debts. For example, interest rates on personal loans currently start around 8% or 9%, but the APRs go up into the 20%s — just as high as credit cards. To qualify for the lowest rates and save the most money by consolidating, you're likely going to need a very good to excellent credit score.

Debt consolidation loans vs balance transfer credit cards

A debt consolidation loan and a balance transfer credit card can both help streamline debt repayment, but they work best in different situations.

Debt consolidation loans are best for individuals with larger debt amounts who want predictable payments and a lower interest rate than their current debts. They are especially beneficial for consolidating various types of debt, including credit cards, medical bills and personal loans.

On the other hand, a balance transfer credit card is best for smaller amounts of credit card debt and borrowers with good to excellent credit who can qualify for a 0% APR introductory period. This allows you to pay off debt interest-free for a limited time, potentially saving you more money than a loan.

You should consider a debt management plan if…

You need help building an affordable repayment plan

Debt management plans (DMPs) are designed to help you budget and figure out a realistic repayment strategy. When you enroll in a DMP through a nonprofit credit counseling agency, a credit counselor reviews your financial situation, including your income, expenses and debts.

The counselor will help you determine an affordable monthly payment amount that goes toward paying off your debts. Then, they will negotiate with your creditors to reduce interest rates and waive fees, making it easier to pay off your debt in full.

You have mostly unsecured debts

DMPs are generally designed to pay off unsecured debts, such as credit cards, personal loans and medical bills. They can’t be used to pay secured debts like a mortgage or car loan because those debts are tied to collateral that can be repossessed if you fail to make payments. If the majority of your debt is unsecured, a DMP could be an effective way to consolidate your payments and reduce interest rates.

You’re worried about your credit score

If you’re already struggling to make minimum payments or have missed a few payments, your credit score is likely taking a hit. Enrolling in a debt management plan can help you avoid further damage by ensuring consistent, on-time payments.

While enrolling in a DMP itself doesn’t directly hurt your credit score, it can temporarily impact your credit utilization ratio and the age of your credit history. This is due to a key requirement of enrolling in these plans; you must close most (if not all) of your credit card accounts, since continuing to use credit while paying off debt undermines the purpose of the program.

You should consider debt relief if…

You’re already behind on payments

When you pursue debt relief, you’re trying to get your creditors to agree to settle your unsecured debts for less than you owe. But creditors only have an incentive to do so if you’re already behind on payments — from their point of view, they’d rather collect a smaller amount than nothing at all.

If you’re already delinquent and can’t keep up, negotiating a reduced balance through debt settlement might be a better option.

You’re struggling financially

Creditors aren’t likely to agree to a reduced balance unless you can demonstrate financial hardship. While you don’t necessarily need to provide proof of job loss, divorce or other life events, being able to clearly explain why you’re struggling to keep up with payments significantly increases the chances of a successful negotiation.

Getting out of debt is a bigger priority than protecting your credit

If you’re drowning in debt and your primary focus is achieving financial stability, the short-term hit from debt relief to your credit may be worth it in the long run.

You generally need to be behind on your payments for creditors to consider negotiating your debt. Delinquent accounts, settled debts, or accounts marked as “paid for less than the full amount” will remain on your credit report for several years, which can make it harder to get approved for new credit in the near future. This approach makes the most sense if you don’t need to borrow again soon, such as taking out a mortgage or car loan

For information on some of the best debt relief programs, visit our page listing the top debt relief companies.

You should consider bankruptcy…

When creditors are suing you or garnishing your wages

Bankruptcy is typically a last resort that should only be considered after other strategies have been explored, as it can have a long-term impact on your credit. However, it can provide financial relief if your debt has escalated to the point where creditors are suing you for unpaid debt, threatening wage garnishment or sending accounts to collections.

If you have little to no assets or savings

Despite all the disadvantages of bankruptcy — a severe impact to your credit score, challenges qualifying for new credit or loans and the potential loss of property and assets — it can provide a fresh financial start.

You’ll need to research the different types of bankruptcy, too: Chapter 7 bankruptcy is a liquidation process that discharges unsecured debts and provides relief from creditors. You have to qualify for Chapter 7 via a means test based on your income. Chapter 13 bankruptcy allows you to reorganize your debts into a more manageable repayment plan and keep your property, with some debt potentially forgiven.

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