How To Pick a Debt Payoff Strategy You’ll Actually Stick With

This article was paid for by Achieve.

Nearly one in three Americans has seen their unsecured debt increase over the past year, according to a recent survey by personal finance platform Achieve and Money.com. About the same share (34%) said they can’t make the full payment on all their monthly bills.

But don’t let these dismal stats prevent you from making a recovery.

“It’s important not to wallow in guilt, shame or frustration about your debt,” Austin Kilgore, an analyst at the Achieve Center for Consumer Insights, told CNBC Select. “Just stick to the facts. Write it all out or use a budgeting tool, so you can really understand the extent of your debt.”

From there, Kilgore said, compare debt relief solutions to find the one that works for you — not just for your budget, but for the type of debt you have, your credit score and your personality type. 

“There’s not a one-size-fits-all approach to dealing with debt,” he added. “The best debt payoff strategy is the one you’re going to stick with and see through to the end. Full stop.”

Here’s the lowdown on the most common debt solutions, including how they operate, their benefits and drawbacks and who they work best for.

With the debt avalanche method, you make the minimum monthly payment on all your debts and put any extra money toward the account with the highest interest rate. Once that bill is paid off, you direct those funds to the one with the next-highest rate and continue until all your balances are eliminated.

“If you want to get really granular, look at both the interest rate and the dollar amount you’re paying in interest each month,” Kilgore said. “That’s a more advanced way to assess which account is costing you the most.”

Debt avalanche pros and cons

Pros: 

• Could save you thousands in interest in the long run. 
• Gets you completely debt-free faster.
• Can help improve your credit score if on-time payments continue.

Cons: 

• You’ll need to accurately track interest rates and balances across multiple accounts.
• It requires motivation, since it could take months (or years) to clear your first balance.

The debt snowball method is a variation on the debt avalanche: Instead of the bill with the highest interest rate, you prioritize the one with the smallest balance. It’s not the most cost-effective approach, but seeing a balance wiped out early helps many people stay on track.

“If you have the mindset where you need to see continued progress to stay motivated, that peace of mind is worth the difference in interest,” Kilgore said.

If you’ve been struggling with credit card debt for some time, your credit score has likely taken a beating. You might feel like closing those cards once you pay them off, but the average age of your credit accounts represents 15% of your credit score.

If you don’t want to ding your score further, Kilgore said, “it could be better to leave revolving accounts open, even after you pay them off.” 

Don’t leave them open if you’re afraid it will be too much of a temptation to spend more, he added. “That’s a higher priority than the benefit it can provide your credit score.”

Debt snowball pros and cons

Pros:

• Quick wins can prevent burnout.
• Straightforward plan without much tracking or calculation.

Cons

• Could result in higher total interest costs compared with the debt avalanche method.
• Because you’re focusing on balance size and not interest rate, it can take longer to become debt-free. 

A balance transfer enables you to move balances from your high-interest accounts to a card with 0% introductory APR.

This gives you some breathing room (up to 21 months with some cards) to pay off your balance without accruing more interest. To get the most out of this strategy, Kilgore said, avoid making new purchases and ensure you can pay off the transferred balance before the intro period expires. Otherwise, any remaining balance will begin accruing interest at the new card’s regular APR.

Balance-transfer card pros and cons

Pros: 

• Lets you pay down principal without accruing additional interest for up to 21 months.
• Since more of each payment goes toward the principal, you can become debt-free faster.

Cons: 

• You’ll need good or excellent credit to get approved.
• You’re just moving your debt, not paying it off.
• Balance transfer fees can be 3% to 5% of the amount transferred.
• Any balance remaining after the promo period ends will accrue interest at the card’s regular APR.

A debt consolidation loan allows you to pay off multiple bills with a single lump-sum loan, ideally at a lower interest rate. Some debt consolidation loan options, like those offered through Achieve’s partner bank, will even pay off your existing creditors directly.

Instead of juggling multiple bills, you’ll make one fixed monthly payment over a set repayment period (typically two to seven years). And unlike credit cards, which usually have variable rates and compound interest, debt consolidation loans make payment more manageable with fixed rates and simple interest.

Achieve personal loans can be used to consolidate debt and are available in amounts ranging from $5,000 to $50,000.* You can qualify with a FICO score of 640+ and get funds sent in as little as 24 hours.

Debt consolidation loan pros and cons

Pros:

• Combines multiple debts into one monthly payment.
• If you qualify, you may secure a lower rate than your credit card’s APR.
• There’s a fixed monthly payment with a clear payoff date.
• Simple interest can keep borrowing costs lower. 
• Paying off credit cards can lower your credit utilization ratio, which may improve your credit score. 

Cons:

• Borrowers with weak credit may not qualify for a favorable rate.
• Loans may include application and origination fees
• A longer repayment term can increase total interest paid.
• If you keep using your credit cards, your debt load will start to climb again.
• Applying requires a hard credit inquiry, which can cause a temporary dip in your credit score

Home equity loans and home equity lines of credit (HELOCs) both allow homeowners to leverage the equity they’ve built in their property to finance large expenses, like debt consolidation, home renovations and higher education.

A home equity loan is a lump-sum loan that’s repaid over a fixed term (usually five to 30 years), while a HELOC is a revolving line of credit, like a credit card. During the draw period, you can borrow up to a set amount and pay down the balance to borrow more.

Achieve Loans‘** fixed-interest-rate HELOC is available to qualified borrowers with FICO scores of 600+, making it a good option if you have less-than-perfect credit. 

Home equity loan/HELOC pros and cons

Pros:

• Rates are typically much lower than with personal loans or credit cards.
• With a longer repayment term, your monthly payments may be smaller.
• A HELOC allows you to borrow only what you need, avoiding paying interest on unused credit.

Cons:

• You need adequate equity, good credit and a low debt-to-income ratio.
• Usually includes lender fees, closing costs and annual maintenance charges
• You risk foreclosure if you fall behind on payments.

Credit counseling is a good starting point if you have steady cash flow but need guidance and structure to tackle your bills. A certified counselor will review your income and expenses and create a debt management plan (DMP). They may also be able to negotiate with your creditors to lower your interest rate or have certain fees waived.

“Credit counseling is a really helpful tool if you don’t have a ton of debt but have really high interest rates,” Kilgore said. “They can help get a reduction in the percentage rate on your account.”

Credit counseling pros and cons

Pros:

• Personalized budgeting guidance from a trained professional.
• You make one monthly payment to the counseling agency, which distributes the funds to your creditors. 
• You may be able to get APRs lowered or fees waived, especially with credit card issuers.
• A DMP may be able to clear your debts in three to five years.

Cons:

• Although most credit counseling agencies are nonprofits, many charge setup and maintenance fees.
• Creditors may not agree to participate in the DMP.
• Credit counseling won’t reduce your principal balance.

• While in the DMP, you’ll likely be required to close credit cards and avoid opening new lines of credit.
• Closing credit card accounts and enrolling in a DMP may lower your credit score.

Debt settlement (also known as debt relief) companies negotiate with creditors to reduce your balance, either with a lump-sum payment or a structured payment plan.

Only unsecured debts, such as credit card and medical bills, can be enrolled in debt settlement. Secured debts (like mortgages and auto loans) are ineligible.

In many cases, you’ll make monthly deposits into a dedicated account while negotiations are underway. Once a settlement is reached, those funds are used to pay participating creditors.

Costs vary by provider and state regulations, but fees can be as high as 25% of the enrolled debt.

Kilgore compared hiring a debt settlement company to fixing a leaky pipe.

“I can watch a YouTube video and figure out how to fix it myself, but it’ll take a long time and I may not get it right,” he said. “Or I can call a plumber and have an expert handle it correctly from the start.”

Achieve’s partner, Freedom Debt Relief (FDR), has resolved more than $22 billion in debt since its founding in 2002. More than 60% of clients receive their first settlement within three months and most clients complete the program within 24 to 48 months.

FDR accepts clients with unsecured debts totaling $7,500. By comparison, some  competitors require a minimum debt of $10,000 for enrollment.

Debt settlement pros and cons

Pros:

• Professionals negotiate with creditors on your behalf.
• Debt settlement may reduce your balance for less than the full amount owed
• The company can’t charge you unless at least one debt has been settled  

Cons:

• Debt settlement programs typically involve fees, which vary by provider, state regulations and individual program terms.
• Whether a consumer negotiates directly with creditors or works with a debt settlement company, accounts may become delinquent during the negotiation process.
• There may be temporary credit impacts during the process, but outcomes vary based on individual circumstances and factors such as payment history, account status and how debts are ultimately resolved.
• There’s no guarantee creditors will agree to settle.
• The IRS may consider your forgiven debt taxable income.

Bankruptcy provides a legal framework for individuals who have exhausted all their other options and are still unable to settle their debts.

Chapter 7 bankruptcy enables borrowers with limited income to have unsecured debts, such as credit card bills and personal loans, formally discharged. They may, however, have to sell nonessential assets to repay creditors.

Rather than discharging debts, Chapter 13 bankruptcy establishes a court-approved repayment plan that may allow borrowers to keep their home and other assets, provided they stay current.

According to Kilgore, bankruptcy is often a long, complex and expensive process, requiring legal representation and multiple court appointments.

“It’s a last resort for the most severe debt-stress situations,” he added.

Bankruptcy pros and cons

Pros:

• Can pause collection efforts, including wage garnishments, asset seizure and property liens.
• Chapter 7 bankruptcy can discharge unsecured debts.
• Chapter 13 bankruptcy can provide a multi-year repayment plan based on your income. 
• Some assets may be exempt from liquidation, including your primary residence, retirement accounts and Social Security benefits.

Cons: 

• Not all debts are dischargeable, including alimony, child support and some taxes and student loans.
• There are significant upfront expenses, including court costs and attorney fees.
• You may be required to liquidate assets to repay your creditors.
• Bankruptcy can significantly damage your credit score and typically remains on your credit reports for seven to 10 years.
• Filings are part of the public record and can affect approval for housing, loans and jobs.