3 Common Debt Payoff Strategies

January 13, 2020 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

3 Common Debt Payoff Strategies

In the U.S., debt is a reality for many Americans. According to the Federal Reserve’s most recent report, our total national household debt is at $13.95 trillion .

That’s a lot of student loans, car loans, mortgages, and credit card debt. And for those who’ve fallen behind, it can mean a lot of headaches and heartache.

If you’ve had enough of all that stress and you’re trying to build a budget that tackles your debt, it helps to have a strategy you can stick to while you also keep current with your other monthly bills.

If you find yourself struggling to make ends meet and are unable to form a plan to get back on track on your own, many people find some assistance by exploring other options, such as a nonprofit credit counseling agency to put together a debt management plan—but there can be some downsides to that decision.

The basic concept seems simple enough: Typically, a debt settlement agency negotiates a repayment schedule with creditors for debt that can include credit cards, medical bills, and personal loans; the consumer makes one payment each month to an account set up with the agency, which includes a small fee; then the agency pays each creditor over an agreed-upon period of time, typically two to five years.

You might want to be sure that you are able to set aside that money for the full term of the plan. If you fail to make your required deposits to the debt relief savings account on time—if an unexpected home repair or medical bill breaks your budget, for example—you can be dropped from the plan and all its perks.

It’s also likely you’ll have to give up your credit cards for the length of the program—and you won’t be able to take out any new lines of credit during that time. And it’s important to note that taking actions like closing accounts may impact your credit history, so it could be a great idea to talk through the pros and cons of this method of debt repayment with a trusted, credentialed advisor.

If that lack of flexibility doesn’t work for you, there are a few other strategies you could consider instead. They, too, take discipline, but you’ll be completely in control of the plan’s structure.

The most well-known of the debt management plans are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies.

Which method is right for you is something only you can decide, and we aren’t advocating one or all of these methods. Here’s just a little bit on each and some of their pros and cons.

The Debt Snowball Method

Once you’ve compiled your monthly budget and have a good idea of how much money you’ll have left each month after paying all your bills, the snowball method directs any excess funds to the debt with the smallest outstanding balance. Here are the basic steps:

•   Disregard interest rates and start by listing your debts based on how much you owe, from the smallest balance to the largest.

•   Make the minimum payment on all other debts and pay as much as you can each month to eliminate the smallest one.

•   After you pay off the smallest debt, you’d turn your attention to the next-lowest balance.

•   Keep going until you are debt-free. (And, of course, avoid the temptation to use the credit cards you’ve paid off.)

Pros: This approach is all about motivation. Instead of slogging away, trying to knock down your biggest debt, you’re picking off the little guys as quickly as possible. Depending on your personality, snowballing could provide the psychological boost you need to keep going.

Cons: It’s more about behavior modification than math. By focusing on the smallest account balance instead of the highest interest rate, you could be missing out on an opportunity to make a more significant dent in your debt. The sooner you get your debts paid, the sooner you can adjust your focus to saving and investing to reach other financial goals.

One debt consolidation strategy to
consider is a personal loan.
Learn more about SoFi personal loans.

The Avalanche Method

The avalanche method puts any excess money in your budget toward the debt with the highest interest rate. Here’s how it works:

•   Disregard minimum payment amounts and balances, and instead list debts in order by interest rate.

•   Make the minimum payment on all debts and pay as much as you can each month to get rid of the bill with the highest interest rate. (So, for example, if you have three credit cards with interest rates of 21%, 18%, and 22%, and a student loan with 6% interest, you’d pay as much extra as you could toward the card with the 22% rate first and keep at it until the balance is zero.)

•   When the first balance is paid off, you’d move on to the debt with the next-highest interest rate. (The 21% card, in this example, then the 18% card, then the lower-interest student loan.)

Pros: Since this method focuses on the most expensive debt first, it helps bring down the amount of interest paid while working toward debt repayment. If you need a reminder of how impactful interest can be, check your credit card bill: The minimum payment warning explains just how long it will take you to get rid of that debt if you pay only what you have to every month.

Cons: This method could take more commitment and discipline. If you’re the type who needs to experience little “wins” along the way, you might lose interest before you wrap up this plan.

The Debt Fireball Method

This strategy takes a hybrid approach to the traditional snowball and avalanche methods of paying down debt.

We call it the fireball method because it can help you blaze through costly bad debt faster so you can accomplish the things that matter to you. The steps include:

•   Categorize all debt as either “good” or “bad.” (Debts with a less than 7% interest rate are “good.” Debts with a higher than 7% interest rate that do not have the potential to increase your net worth are considered “bad” debt under this method.)

•   List “bad” debts from smallest to largest based on their outstanding balances.

•   Make the minimum monthly payment on all outstanding debts, then funnel any excess funds to the smallest of your “bad” debts.

•   When that balance is paid in full, you’d go on to the next smallest on the bad-debt list. Torch those balances until all your bad debt is repaid.

•   When that’s done, you’d keep paying off your “good” debt on the normal schedule while investing in your future. Then you could start applying the money you used to pay toward your “bad” debt to a financial goal, such as saving for a house, starting a business, saving for retirement, etc.

Pros: The math here may make more sense because you’re taking on more expensive debt before less-expensive debt. And it can also work from a psychological perspective because the payoff tends to accelerate as you approach the finish line.

Cons: If you’re more interested in dumping all your debt first before investing in the future, this approach might not satisfy your need to make even low-interest debt a payoff priority. Also, it typically isn’t as mathematically efficient as the avalanche method—though it could be more cost-effective than the snowball method.

Consolidating Your Debt With a Personal Loan

Looking for another method to help pay off your debt? A personal loan from SoFi may be the right choice for you. SoFi offers low-rate, no-fee option, unsecured personal loans to help you save money on your debt.

With a fixed monthly payment, you may qualify for a SoFi personal loan to consolidate credit cards or other high-interest debt at a more competitive interest rate.

It only takes minutes to see your rates. Get started.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender