Debt is a major issue in America, with the average adult carrying north of $100,000 in debt, according to a recent Experian survey.
As of 2024, the total household debt in this country reached nearly $18 trillion, according to the Federal Reserve Bank of New York.
Debt doesn’t just affect the credit holder's wallet and credit score, but their mental status and also puts strain on the entire family.
While there's no magic wand to eliminate debt overnight, having a plan on how to start paying down your debt off can reduce stress, increase a sense of having control and allow you to focus on other things that matter in life.
In fact, having a plan can help with sleep and your mental health, according to Equifax.
Here are three of the most common ways Americans pay off debt. Each one has benefits and negatives so consider what the right approach is for you and your situation.
The Snowball Method – Building momentum
Simply put, this method is the best for those who like to see immediate, small wins and use that momentum to pay off larger debts.
Meet Erica, she just moved and is saddled with several debts large and small.
To begin this method, Erica sits down and list all of her debts, from the smallest to the largest. Her smallest debt is one that's under $1,000, so she decides to attack that first.
While she continues making minimum payments on all her other debts, she puts any extra cash towards the smallest one.
After two months, she's paid off that credit card and wants to move onto the bigger cards she owes. It's a big mental boost to see those debts cleared off the table one by one.
Now, you roll the extra payments you were making on that first debt into the next one and then the next one and so forth. This creates a “snowball” effect—gradually, your payments get bigger as you pay off each balance, gaining more momentum with every debt eliminated.
The Avalanche Method – All about saving money
The Avalanche Method is all about saving as much money as possible in paying off debt, where the highest interest rates are paid off first, no matter the outstanding debt.
You begin by listing your debts, but this time, in order of interest rate, from the highest to the lowest.
Andrew is someone who has debt in various areas like credit cards, a mortgage, student loans and more. So, the interest rates vary greatly.
So, he decides to tackle a personal loan first, since it carries the highest interest rate.
He continues making minimum payments on all debts, but any extra money goes toward the one with the highest interest. Once that debt is paid off, he moves on to the next highest interest rate, and so on.
This method takes someone who has patience as he could be tackling a large debt to begin and it may take months or years to pay off.
But if he's methodical, he could save money and lower his monthly costs over time by eliminating the highest rates.
Debt Consolidation – Getting it all together
For those who don't like the juggling of various debts, consolidation might be the best answer.
This strategy allows you to combine several debts into one single loan or payment, often with a lower interest rate.
There are a few ways to start.
One way is to do it yourself by taking out a personal loan, using it to pay off all your existing debts. Another method is using a balance transfer credit card, where you move other debt balances onto this new card and sometimes will pay no interest for a set period of time if the card offers this.
Leia hates the various apps on her phone, websites on her computer and more that she's had to access to slowly pay off her debt.
She's even missed a payment before because she forgot about a credit card she had a small balance on. This resulted in a penalty and a fee.
Debt consolidation has made her life simpler, where she now makes one payment each month.
Now some debt consolidation can affect your credit score, so make sure as in all these methods, to speak to a financial professional before taking any action.
For more on personal finance topics
If you have more questions about personal finance topics, visit the Learning Center on TD Bank's website. You can find more TD Bank services at TD.com.
We hope you found this helpful. This article is for informational purposes only and is based on information available as of October 2024 and is subject to change. This content is not intended to be used or acted upon with respect to any client's specific circumstances. For specific advice about your unique circumstances, consider talking with your qualified professionals.
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