What’s the Best Debt Payoff Strategy?

Debt is a growing issue for many, whether it’s from credit cards, student loans, car payments, or any number of other financing tools. While these resources are helpful to a point, it can get expensive, especially when you have multiple high-interest debt payments to take care of each month.

If you’re serious about paying down your debt, a strategic game plan that plays to your strengths can make a huge difference. There are tons of different tactics you can use, but ultimately, the best strategy is the one that really sticks for you. Here are the four most popular debt payoff options to determine what works best for your individual habits. 

How to Prioritize Your Debt

Before you choose a debt payoff strategy, it’s smart to prioritize the type of debt you want to get rid of. Start by listing out all of your current loan, credit card, and line of credit balances. In addition to looking at the most up-to-date balances, also compare interest rates and term lengths.

For long-term installment loans like your mortgage, you may want to keep them low on the priority list, assuming your rate is low and you’re current on your payments. Plus, installment loans don’t hurt your credit score as much as revolving credit does. 

High-interest loans and credit cards, on the other hand, should be at the top of your list. You can tackle these accounts in a few different ways, which we’ll discuss, but it’s important to understand these different levels of debt. 

Your priorities can also vary based on your specific goals, such as repairing your credit or getting out of an underwater auto loan. Once you have a general idea of which debts are most important to pay off first, you can pick one of the following strategies to make it happen.

4 Debt Payoff Strategies

Now that you have a general idea of which debts to pay off first, it’s time to start planning. Here are four strategies to consider.

Option 1: Pay Off One Balance at a Time

If you want to see the fruits of your labor pay off as soon as possible, start by selecting just one credit card or loan to pay off first, rather than spreading out extra payments over multiple balances. You’ll still make the minimum payments on your other debts, but also funnel all your extra cash towards a single balance. 

When picking which one to pay off first, people usually choose one of two options: the credit card or loan with the smallest balance or the one with the most expensive APR. Here are the advantages of each one to find out which would be more motivating for you.

Benefits of Starting with Lowest Balances

The best part about paying off your lowest balance first is that it gives you a faster win. You might get discouraged if you start off paying down your highest debt because you may not feel like you’re making progress.

As you begin to build the habit of funneling extra money towards your debt, you’ll instead feel excited as you start to see that lower balance get closer to zero. That early success could give you the momentum to keep up with the extra payments as you continue moving on to larger and larger debts.

Benefits of Starting with Highest APRs

When you choose to focus on one debt with the highest interest rate, you’ll end up saving yourself the most possible money in the long run. You don’t have to worry about those high-APRs hanging over your head for any longer than you let them. 

While your most expensive debt might not be the lowest debt, and therefore take you longer to repay, it’s a great option if you’re the type of person who gets motivated by the bottom line. Do what you need to do to stick with your debt payoff plan, but it’s really ideal when you can save yourself the most money as well.

Option 2: Make Micropayments Throughout the Month

Rather than focusing on just one payment for each balance throughout the month, consider making micropayments multiple times in advance of the due date. There are a few benefits to using this strategy. It can help you stay committed to paying down debt if you automatically transfer money from your paycheck to your credit card bill.

It can also help save you money in the long run. Even if you apply a bi-weekly strategy to accounts on which you’re only making the minimum payment, you’ll still end up applying an extra payment each year with this method. 

Alternatively, if you simply make additional transfers to your statement as you have extra cash in your budget each week, you’ll stay motivated to abstain from small purchases here and there. This can help you quickly eradicate your debt.

An easy example of how to do this is to give yourself short periods of low or no spending. One weekend you could rent a Redbox movie instead of going to the movies, or host happy hour at your place instead of going to the bar. Immediately transfer the difference in savings to your credit card bill. 

As you build this habit, then try going even bigger by doing a week-long spending freeze. During this period, you literally don’t spend anything besides paying bills that are due and other legitimate obligations. When the week is over, see how much you saved and use that money to make another credit card payment.

After making these micropayments, still pay the usual amount you’d apply to your balance on the due date. This way, you’re making additional payments that pay down debt faster and save money on interest that accrues more slowly. 

Option 3: Use a Low-Interest Balance Transfer

If your debt is primarily centered on credit cards, consider paying it down using a balance transfer card with a low or 0% APR offer. This process allows you to take multiple balances and pay them off using one single credit card. You then don’t have to worry about managing multiple accounts and due dates. Instead, you resume making regular monthly payments on the new card.

The key is to find a card with terms that are more favorable than what you currently have so you can save money and hopefully put more money towards the balance. The first term to look at is the introductory APR, which should be substantially lower than your current rate. Some credit card companies even offer a 0% APR for a certain period of time.

Once the introductory rate ends, check out the standard rate you’ll be charged to make sure it isn’t substantially higher than your current card’s rate. If it is, you may end up spending more than you would have if you kept your original card, especially if you have a financial hiccup that prevents you from paying off your balance as quickly as you planned.

The higher rate may also be applied to any additional purchases you make using the new credit card, so plan accordingly if you think you’ll use that account moving forward. 

Finally, most balance transfer credit cards also charge a balance transfer fee. This could be anywhere between 2% and 5% of the total amount you transfer. If, for example, you transfer a $10,000 balance, you may have to pay an additional $200 to $500. In order for this debt payoff strategy to work, you need to make sure you save money on the entire process, not just the introductory rate.

Option 4: Apply for a Debt Consolidation Loan

A final tactic to pay off your debt more quickly and efficiently is with a debt consolidation loan. It acts similarly to a balance transfer credit card, except that you take out a personal loan to pay off your outstanding credit card balances. Then, you make one loan payment each month.

One of the key differences between this strategy and a credit card transfer is that a personal loan is repaid over a fixed period of time. You have a set payment due each month that doesn’t change, making it easy to create a budget and stick to it. You also know when you’ll be done paying off your loan. If you prefer more structure to your debt payoff plan, this could be a good fit. 

Depending on your credit score, a personal loan could help reduce your interest rate compared to your credit card. You may, however, need to pay an origination fee. Like a balance transfer fee, it’s charged as a percentage of the loan amount. Also, you can save even more money by paying off your debt consolidation loan early, but you need to first make sure that there’s no prepayment penalty. As long as all of the loan’s terms and conditions make financial sense, this could be a strong option.

The Bottom Line

No matter what debt payoff strategy you choose, deciding to take action is the most important step of all. Don’t be discouraged if you don’t stick with the first plan you choose. Keep trying different tactics until you find one that works for your lifestyle, then start building better financial habits as you move forward.