Lyn Alden, a 29-year-old investment strategist in Atlantic City, N.J., paid off over $48,000 worth of student loan debt in 2015, just five years after she started repaying it. But she didn't come into a windfall of cash — she simply focused on one balance at a time and came up with a two-pronged plan of attack.
"Some of the loans charged several full percentage points higher interest, so I paid those off first," she tells MagnifyMoney. "The difference in interest savings over a few years was just too large to pass that up."
Once her most expensive loans were paid down, Alden switched gears. She tackled the remaining debts in order of smallest balance to largest, snowballing her payments as she went along. In other words, she utilized two different debt repayment strategies to supercharge her efforts and ultimately get almost all her balances to zero.
When it comes to paying off a large amount of debt, Shashin Shah, a certified financial planner and director at SFMG Wealth Advisors in Plano, Texas, says using a mix of strategies is often the best way to go.
"A lot of times when people get themselves into debt, the debt doesn't accumulate all at once,” Shah says. "Instead, it's small debts that accumulate over time. And then it gets to a point where it's beyond reproach, and they're not quite sure how to pay it down."
Total household debt is on the rise, hitting $12.73 trillion earlier this year, according to the Federal Reserve Bank. If you’ve got some skin in the game, we’ve come up with four tried-and-true methods to get debt-free — and the pros and cons that go hand in hand with each one.
1. The snowball method
Commonly known as the snowball method, this approach has you prioritize lower balances over high-interest debt. The biggest draw here is that doing so comes with built-in milestones since you're knocking out small debt after small debt.
"I think the biggest benefit is psychological and behavioral, by far," Shah tells MagnifyMoney. "There may be an advantage to paying one [debt] down, getting it to zero, then paying the next one down, getting it to zero, and feeling a real sense of accomplishment."
Alden echoes the same, acknowledging the psychological boost she experienced using this method. But her case is unique in that the debts she snowballed only differed in interest rate by one percentage point or less. Had she put high-interest debt on the backburner from the get-go, she would have ultimately paid more over the long haul. It also would have taken her longer to get debt-free. This is precisely why Shah suggests using a mix of different debt repayment strategies that best fit your situation.
Because this is the case for so many people, Shah says the snowball method can be really effective since you're frequently eliminating balances — and stoking your motivation in the process.
It turns out he's on to something. According to research put out by the Harvard Business Review and published in the Journal of Consumer Research last year, people appear to stay more motivated to get debt-free when they focus on one small balance at a time. Researchers credit this to the idea that most of us tend to measure overall progress by the greatest balance reduction within an individual account.
2. The avalanche method
While the snowball method is associated with frequent bursts of motivation, concentrating on high-interest accounts first (also known as the avalanche method) might serve you better in the long run.
"Even though each individual itemized credit card may not be paid off in the order you'd like it to be paid off, ultimately you should be able to shrink the amount of time it takes to pay the debt off and the amount of money you're paying; those are very big factors," says Shah.
Not sure which method is right for you? Plug your debt numbers into MagnifyMoney's Snowball vs. Avalanche Calculator to see how much you'd save by wiping out the highest-interest accounts first. Depending on the size of your debt, the number of open accounts, and how steep your minimum payments are, you could save significantly more.
Matthew Burr, a 34-year-old HR consultant and associate professor at Elmira College in New York, used the avalanche method to pay off $74,000 in student loan debt over a 24-month period.
"The motivator was watching the interest accrue throughout the week; on average, at its peak, the amount was increasing $100 dollars per week," Burr tells MagnifyMoney.
His plan of attack was to make minimum payments on all seven of his loans, while putting extra toward whichever one had the highest interest rate. He recognizes, however, that it was difficult to stay motivated after the first 15 months, when a huge chunk of his income was being directed toward debt repayment. But Burr stayed the course and has no regrets.
3. Debt consolidation — Balance transfer vs. personal loans
If you're face to face with a mountain of high-interest debt, balance transfer offers can be a powerful tool in your arsenal — so long as you can pay off the balance within the promotional period, when the teaser rate is in full effect. Just keep in mind that most of these offers come with a 3% to 4% transfer fee. That said, it can still save you money in the long run.
"The challenge most consumers will have is that if there's no plan in place, you could end up damaging your credit, certainly," he adds. "Instead of transferring all the debt, only transfer the debt that can be paid off during that [promotional] time, then it should be a very effective method."
Before pulling the trigger on a balance transfer, consider things like the length of your credit history, how many recent inquiries you've had, and what your credit utilization ratio looks like, all of which impact your credit score.
If a less-than-perfect credit score takes balance transfers off the table, personal loans represent another way to cross the debt-free finish line. In this case, interest rates are important; shopping around for a lender that’ll give you the best rates and terms can significantly reduce your overall debt burden. Just be sure to apply with lenders that use soft credit pulls so you don’t inadvertently impact your credit score in the process.
Consolidating higher-interest debts using a personal loan can save you money in the long run by bringing them all under one new (and preferably lower interest) umbrella. There’s also the convenience factor of only having to make one monthly payment.
4. The high minimum payment approach
Being on the hook for multiple debts means multiple monthly payments. Knocking out those higher-payment debts first can unlock more cash in your monthly budget. If it's part of a big-picture debt repayment strategy, Shah says you're better off going with the avalanche, snowball, or a mix of both. But if you're looking to free up money to fund other needs, like establishing your rainy day fund, it could make sense.
No matter which strategy you choose, always make the minimum monthly payments across all your accounts. The idea is to funnel all extra money toward one individual debt at a time, whether it's the one with the highest interest or the lowest balance. After you eliminate it, take what you were paying on it, plus any extra money you can squeeze from your budget, and apply that directly to the next account, repeating the process until you're out of the red.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.