The Best and Worst Ways to Pay Off Debt

The Worst Advice You Can Get to Pay Off Debt (And What to Do Instead)


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Heads or tails?

If you want to pay off debt you can’t leave it to chance.

Choosing a strategy might feel like picking a side to a coin. Will it really work?

You should pick a solution that will get you the best results while sparing your dignity.

When it comes to paying off debt, there are solutions you should avoid like the plague.

Don’t sentence yourself to the worst possible payoff strategies.


Strategies to Avoid When You Pay Off Debt

Bad Strategy 1: Debt Consolidation Companies

The claim of these companies is you can get one low payment with a lower interest rate, which sounds good on the surface.

Behind the scenes they contact your creditors to negotiate a payoff.

You can do this yourself. You don’t need someone else to make payoff arrangements.

You pay them, they in turn pay your bills … and pocket a fee along with it.

You aren’t truly consolidating anything.

If you are current on your payments, these companies will have you default so that you can settle … this is terrible!

If you’re already in default then you should take the initiative to call and talk to the collectors and work out a way to pay them back. It’s not fun, it’s not easy, but it’s better to own up to your situation and work out of it yourself.

When going with debt consolidation companies you ultimately end up with worse credit and paying even more than you owe with extra fees and extended the amount of time you remain in debt.

Should I consider this option: No.

I recommend you don’t even consider these companies.

They don’t do anything you can’t do yourself and they charge you extra money that you can’t afford because you’re already having trouble paying off debt as is.

Bad Strategy 2: Bankruptcy

*This is basic layman’s terms. Please see an attorney for legal information and counsel. Use caution selecting an attorney, some bankruptcy attorney’s want you to file bankruptcy because that’s what they get paid for.

Two common types of bankruptcy are Chapter 7 and Chapter 13.

Most people are more familiar with Chapter 7. It sounds appealing because it wipes the slate clean and gets rid of unsecured loans (like credit cards).

What it doesn’t get rid of are secured loans like a car or a house.

There are two outcomes on secured loans: pay them back or lose your stuff.

If you can’t pay back your car or your house “the bank” takes them. (Repossess the car or foreclose on the house.)

You’ll also still owe the IRS, student loans and child support if you have those. These don’t qualify for bankruptcy.

Chapter 13 bankruptcy is basically a court ordered payment plan to bring you current over the course of a few years.

Should I consider this option: Almost never.

In extreme cases of debt you should seek professional counsel. In most cases, you can handle paying off your debt on your own, even if it’s crazy hard.

It requires sacrifice and determination, but it can be done!

There are long term consequences for filing bankruptcy. It will remain on your credit for 7-10 years and will haunt you forever that you had to go through with it.

Bad Strategy 3: Refinancing for Debt Consolidation

Unlike a debt “consolidation” company, who only handle paying your payments for you, you might be considering a true consolidation.

In this situation you’d refinance all your debts and pay them off by putting them all under one umbrella (i.e. debt collector).

A common way of doing this is refinancing your house and using your equity to pay off debt and rolling it into your mortgage payment.

Another consolidation would be paying all debts with a personal loan and making a single payment on that personal loan.

Should I consider this option: Almost never.

The only time I might consider this option would be to avoid bankruptcy. Other than that, avoid it.

A major problem with this is you will still have access to all your credit cards that can easily start accruing debt again. If you got out of control once, you’ll likely start collecting debt again. Only the next time you might not be able to refinance and will be in worse trouble.

It's very important to change your mindset and behavior toward debt so that you don't repeat the cycle.

Summary of Bad Strategies

These are all bad strategies because they cost you more money, ruin your credit and can cost you your dignity.

The people who are telling you to choose these options are all people making big bucks off your misfortune. They make it smell like roses to you because they want a piece of the pie without thought to the damage it’ll do to your credit and your reputation.

What does work?

In most cases, even if you think you’re in a dire situation, you can overcome your debt on your own.

It’s hard, I’m not saying it isn’t.

I’ve been working on paying off debt (student loans and medical bills) for years, so I know how hard it is.

Benefits of doing it on your own.

  • You can be proud of yourself. You don’t have to climb under a rock and hide from a bankruptcy or debt collectors.
  • Your credit score improves instead of gets ruined.
  • You learn self-control over your finances and learn to find value in more precious things like relationships and family.
  • Once your debt is gone, you free up a significant amount of money that you no longer need to delegate toward debt. It’s like a big pay raise!

Steps to Pay Off Debt

Stop Using Credit and Switch to Cash

If you ever want to get out from under a mountain of debt, you can’t keep adding more debt to the top of your pile.

Stop using credit cards.

Related Article: Why I Never Use Credit Cards (And You Shouldn’t Either)

Related Article: How to Pay Cash for Big Expenses (And Stop Relying on Credit Cards)

I switched over to paying with cash wherever possible, i.e. anytime I go into a store.

This forces me to stick to my budget, when my cash is gone I can’t keep spending.

For online purchases I use a debit card. It has never been a problem that I don’t own a credit card.

An easy way to switch to cash is to use Dave Ramsey’s envelope system. If you want something a little lighter you can get this cash envelope printable.

Create and Stick to a Budget

A budget is just spending your money intentionally.

You’ve worked out a plan how to pay for and afford what you can.

Create a budget that works and practically runs itself by joining the 5-Day Budget Challenge: From Busted to Balanced.

Live on Less than You Make

Budgets 101 – don’t spend more than you earn and you’ll be golden.

If you’re working on paying off debt, you need to take it a step further and keep your spending well below your earnings. This way you’ll have extra money to put toward debt.

Cut Expenses

If you can’t fit all your living expenses it’s time to start making cut backs. Here are several areas you can trim expenses:

  • Disconnect cable and go with a digital antenna or streaming service.
  • Use a pre-paid cell phone for emergencies only.
  • Install CFL or LED lightbulbs.
  • Line dry your clothes.
  • Only eat at home. Pack lunches for work and meal plan for dinners.
  • Plant a garden.
  • Save money on groceries by shopping with coupons.
  • Shop around for a better insurance plan.
  • Cancel subscriptions to newspapers, magazines, and gyms.
  • Limit entertainment to things you can do for cheap or free.
  • Reduce the number of times you visit the salon.
  • Extend the life of your clothes, find ways to save money on children’s clothes.
  • Downgrade your car, use public transportation or carpool.
  • Consolidate student loans using SoFi. This is different than consolidating credit card loans because you won’t regain more student loans after you refinance. This is a good option if you can lower your interest rate and consolidate multiple student loans into a single payment.

Bring in Extra Money

Accelerate debt pay off by increasing your income.

This can be difficult to do, but remember it’s only temporary.

Think of it this way, once you’ve paid of your debt you’ll be able to quit working so hard and you’ll keep your increase in pay because you’ll no longer have your debt payments to make.

Here are a few ways you can increase your income:

  • Sell items that you don’t use.
  • Offer freelance services that utilize your skills.
  • Drive for Lyft. Lyft frequently has a bonus offer so you can make even more money for giving a specific number of rides during your first several weeks you drive.
  • Teach private lessons: music lessons or tutoring.
  • Babysit/Home Daycare
  • Get a second part time job.

Use the Debt Snowball Strategy

This is key to paying off debt fast. If you keep paying minimum payments you’ll be in debt forever.

Now that you’ve created a budget, cut expenses and increased your income you should have extra money that you can put toward your debt.

The debt snowball works by paying off a low debt first, then rolling the money for that bill into the next lowest debt.

Take a look at this example:

An example of how to use the debt snowball to pay off debt faster.

Once Credit Card A is paid for, use the money from its old payment to pay off Credit Card B faster. Then roll all the money from Credit Card B into the Car.

By using this method, your money has a “snowball effect” and continues to grow. You move the larger amount of money to pay off the next lowest debt and it will be paid off very quickly, in turn letting you move even more money to the next debt.

The reason you start with the lowest debt rather than highest interest is so you can pay it off quickly and start to build your snowball payment. This can be very encouraging to see that you're making progress in paying off debt.

My Success Story

We’ve had TONS of debt to overcome in my family. (Nearly $100,000.)

A very small percentage came from credit cards, which we paid off in a couple months and then never used again.

Most of our debt was from our cars, student loans, medical bills and a business loan.

We paid off our car and it has been SO nice to not have a car payment for so many years. We’ve also successfully paid off our business loan and most of our medical bills. All that’s left is some student loans. We’ve been working on paying off debt for about 5 years, which is much faster than the dozens of years it would take if we stuck to the banks payoff plan.

We’ve relied on the debt snowball strategy and been able to roll our prior payments to old debts to pay extra on our student loans. We’ll be paying off our student loans soon and then we’ll also be able to pay off our house early.

Steps to Pay Off Debt Fast

  • Stop using credit and switch to cash
  • Create a budget and stick to it
  • Live on less than you make
  • Cut expenses
  • Make extra money
  • Use the debt snowball method to pay off debt
I'm trying to pay off debt and I'm glad I didn't fall into some of these traps. It's better for my credit, my wallet, and my pride! The cool thing is it shows you the best way to pay off debt fast.
I'm trying to pay off debt and I'm glad I didn't fall into some of these traps. It's better for my credit, my wallet, and my pride! The cool thing is it shows you the best way to pay off debt fast.
I'm trying to pay off debt and I'm glad I didn't fall into some of these traps. It's better for my credit, my wallet, and my pride! The cool thing is it shows you the best way to pay off debt fast.

Cameron is a Financial Coach who works with couples and individuals to achieve financial freedom and peace of mind. She believes being in control of money = less stress + more fun! Join her on the journey to think about money less and enjoy life more.