How to get out of debt: 9 proven strategies that actually work

Especially in this economy, one place you don’t want to find yourself in is debt. Life is expensive enough without hemorrhaging money in interest charges.

Still, it’s a situation that’s becoming increasingly common. If you’re one of the many looking for an escape from the heavy burden of debt, give these proven strategies a try.

The first step to getting out of debt

To be sure, there are powerful strategies to eliminate debt. But for any of them to work, it’s critical to identify and fix the circumstances that caused that debt in the first place. You may be struggling because of a job loss, a large emergency purchase, or simply impulse purchases. Whatever the case, you won’t be able to zero out your debt with the following methods unless you address those issues. You’ll also need to know:

- How much debt you have.

- Your total monthly spending on necessities like rent, utilities, food, gas, etc., as well as your minimum debt payments.

- The amount of remaining income that can be channeled toward paying down your debt faster than just the minimums would accomplish.

This will give you the information you need to budget properly and help you decide which strategy will best serve your needs.

Debt snowball method

The debt snowball method to getting out of debt is a simple concept: Pay off your balances in order of size, starting with the smallest and working up to the largest. This is the fastest way to eliminate the number of outstanding accounts you have, thereby lowering the number of monthly fees you’re paying toward.

As you eliminate your balances, you’ll free up more of your monthly income to put toward your remaining debt (effectively “snowballing” the amount of funds you can use to pay down your loans). Plus, you get the mental win of seeing accounts zeroed out sooner.

For example, you may have the following estimated credit card balances and payments:

- $2,000 ($70 monthly minimum payment)

- $4,000 ($110 monthly minimum payment)

- $5,000 ($150 monthly minimum payment)

With the snowball method, you would pay off the $2,000 balance first. This would give you $70 more per month to throw at your next target, the $4,000 balance.

Debt avalanche method

The debt avalanche method favors targeting accounts with the highest APR (annual percentage rate) instead of the lowest balance. The idea is to knock out the cards that are costing you the most in interest. As an example, let’s say those aforementioned hypothetical credit card balances are subject to the following APRs:

- $2,000 (22% APR)

- $4,000 (19% APR)

- $5,000 (27% APR)

The avalanche method dictates that you focus on the $5,000 balance first, followed by the $2,000 balance. You won’t lower your number of outstanding balances as quickly, but you may save money on interest charges in the long run.

Pro Tip

See our analysis of the debt snowball vs. avalanche strategies.

Debt consolidation

One of the biggest factors of your credit score is credit utilization. This is calculated based on the percentage of revolving credit that you’re currently using. For example, if you’ve got a total credit limit of $50,000 and you’re currently using $25,000 of it, your credit utilization is 50%.

Experts recommend keeping your credit utilization below 30% to avoid negative impact on your credit score. If you’ve got considerable debt, your credit utilization may be well above that—which can result in an unimpressive credit score.

However, if you’ve still got a good credit score (ideally 670+), you may opt for one of the below methods.

Debt consolidation loan

With a debt consolidation loan, you’ll receive a chunk of cash to repay multiple credit card and/or loan balances. This wipes out your current collection of monthly payments and replaces them with a single installment loan payment. Depending on the term length you choose, the new loan’s minimum payment may be a big one—but it can still be considerably less than the combined total of the many monthly payments you’re currently making.

And because debt consolidation loans are installment loans, the money you use to pay off your credit card will almost immediately improve your credit utilization. You may see a huge credit score increase in just a month or two.

Balance transfer credit card

You can also consolidate your debts by opening a balance transfer credit card and relocating your current debt onto it. Several credit cards come with 0% intro APR for a year or two. That can quite easily save you hundreds (even thousands) of dollars per year, depending on your amount of debt.

There are two caveats to this strategy:

- You’ll often have to pay a balance transfer fee (typically up to 5% of the transfer amount).

- You can only transfer as much as your balance transfer card’s credit limit can hold—including the balance transfer fee. For example, if you receive a credit limit of $15,000 and a balance transfer fee of 3%, you’ll only be able to move a maximum of $14,563 ($14,563 + 3% = $14,999).

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