How to pay off debt in 5 easy steps

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Ever feel like you’re two steps forward, one step back when it comes to paying off debt? You aren’t alone—it’s a challenge for many, especially as the cost of living rises.

Although it certainly helps, there’s more to paying off debt than cutting back, earning more, and contributing every extra penny you have. 

Here are 5 strategies that can help make paying off debt easier.

Use a payoff strategy

While figuring out your strategy, continue making minimum payments on all your accounts to avoid late payment fees and potential harm to your credit score.

1. Start by making a list of all your current debts, including each account’s balance and interest rate (you can get this information on your monthly statement). 

2. Find out if any of your loans have a prepayment penalty, as that could impact your decision to pay off the loan early.

3. Choose one of the following two methods for determining where to apply any extra money you’ve set aside for debt payments.

• The avalanche method

  —This approach can save you the most money overall, as you’ll put extra payments toward the account with the highest interest rate. Once you pay that account off, move on to the account with the next highest rate. For example, if you have one credit card balance of $6,600 with 18.99% APR (Annual Percentage Rate) and another balance of $3,500 with 11.99% APR, you would pay off the one with the highest rate first.

• The snowball method

  —This approach can help you build momentum and stay on track with debt payoff. Organize your accounts based on the total balance due, then focus on paying off the account with the lowest balance first. Keep the momentum going as you cross one account after another off your list. Using the example above, you would tackle the $3,500 balance first, and when that is down to $0, move on to the $6,600 balance.

It’s hard to say which method is best, as everyone’s circumstances are different. Some studies show that the snowball method could lead to long-term success for more people. But, if you’re a numbers-driven person or find that the avalanche method could save you more money, it might be the best approach for you.

Some people also supplement either approach with the snowflake method, in which you put any unexpected income or savings toward a debt rather than spending it. 

Make multiple payments each month

Many loans and credit cards may charge you interest daily, but there’s a handy trick below that could save you money over the lifetime of your loan. If you don’t know how your lender calculates interest, check your statement or contact them directly.

Rather than making one payment each month, pay half your bill halfway through the month if possible. By doing so, you’ll be saving the daily interest that would have applied to that balance for the next couple of weeks.

Even better, make bi-weekly payments when you can, especially if your payments align with your paydays.

Let’s say you have a $10,000 loan with a 7.00% APR and 60 month (5-year) term. Your monthly payments will be $198.01, or your bi-weekly payments will be $99.01. If you use the bi-weekly method, you’ll pay off the loan in 54 months and save $194.40 in interest. Look for a calculator online to see the difference between monthly and bi-weekly payments.

Multiple payments can be especially helpful with loans or credit cards that have a high interest rate or a high balance (such as a mortgage), as they may accrue significant interest each day. No matter the type of loan, check with your loan servicer to see how it handles extra payments.

Consolidate your debt

Consolidating your debt can make it easier to manage your payments and save you money in the long run.

Generally, it’s easiest to consolidate debts using an unsecured loan, such as a personal loan. Using a single new loan to pay off multiple loans will leave you with fewer payments to make each month, helping simplify your finances. For example, you might take a $10,000 personal loan and pay off three smaller debts with that sum.

The other benefits vary depending on the terms of your loan.

• If you qualify for a lower interest rate than you're currently paying, you can save on interest each month and put those savings toward paying off your loans sooner.

• A personal loan with fixed-payment structure over a set period of time can help put a debt-free endpoint in sight.

• If you’re struggling to afford your monthly payments, consider exploring a new loan with a longer term. While this may lower your overall monthly payment amount, it may also increase how much interest you wind up paying over the life of the loan.

You can also consolidate debts with a secured loan, such as a home equity loan (HELOAN) or home equity line of credit (HELOC). However, these often require an application that can be as complex as applying for a new mortgage. Secured loans tend to have lower rates than unsecured loans, but they come with another risk—your lender may be able to claim your property if you fall behind on the payments.

Refinance a loan

You may also be able to refinance debt to lower your interest rate or decrease your monthly payment. Similar to consolidation, when you refinance a loan, you’re taking out a new loan to replace your current loan. However, refinancing can also mean changing the rate and length of your loan.

Generally, you use the same type of loan when refinancing, e.g., you apply for a new auto loan to refinance your existing auto loan, or a new mortgage to replace your existing mortgage. You can also refinance student loans, swapping out old student loans (government and/or private loans) with a new private student loan.

Refinancing can be especially appealing if your credit has improved since you took out the original loan. Perhaps you now earn more money, have less debt, or have an improved credit score—all or any of these things can help you qualify for more favorable terms when refinancing. You’re not the only factor here though, as current market rates can also determine the rate you’re offered during refinancing.

Use a balance transfer credit card

If you have a credit card balance that you can’t pay in full over the next few months, you may want to consider a balance transfer if a few extra months will help you get it to $0. But, proceed carefully—balance transfers often have transfer fees and high APRs once the promotion expires. 

For example, you may be able to get a card with 0.00% APR on balance transfers for the first 18 months. You could transfer other credit card debt to this card, and then pay off the balance over time without having to pay any interest. Some cards also let you “transfer” money into a checking account, which you can use to pay off other loans.

Balance transfer credit cards can be risky, though. If you don’t pay off the debt before the end of the promotional period, you may wind up carrying a balance that has a higher interest rate than you’re currently paying. You may also not get approved for a high enough credit limit to transfer much of your debt.

There’s no one-size-fits-all solution

Don’t be scared to try something completely different or mix-and-match ideas. Perhaps you use the avalanche method to knock out a few exceptionally high-rate loans, then switch to the snowball method to stay motivated. Or, if you don’t get approved for a great consolidation loan today, you can try again later with a different lender after improving your credit.

Learning the various methods, strategies, and tools for debt reduction is an important first step. Although, you’ll still have to go through an often challenging process, sticking with it until the end can provide you with greater fiscal stability and a brighter financial future overall.

Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.