Methods For Paying Down Debt

It’s common for people to resolve to start something new that improves their life at the beginning of a new year. In our December Financial Sense¢ call, we asked our students to tell us about their New Years resolutions for 2022. We’ll be covering some of their most common responses, and ways to achieve them, in the next few weeks, starting with reducing debt.


Reasons We Get Into Debt


There are many reasons we might find ourselves with overwhelming debt including:


  • We didn’t understand how to use credit cards wisely when we were younger
  • We had an emergency and no other way to pay for it
  • We thought we could handle the payments, but it turned out to be harder than we thought


Reasons To Reduce Debt


There are many reasons for us to want to reduce debt including:


  • The cost of making payments is overwhelming.
  • The number of bills to keep track of is overwhelming.
  • We regret making past mistakes.


No matter the reason, though, there are ways to approach solving the problem with the right self-discipline, motivation, and patience. Reducing debt is rarely an easy process, but it can be worth the peace of mind a debt-free lifestyle offers.


Options For Reducing Debt

Making Extra Payments


Some types of debt, such as mortgages, car loans, or personal loans, have fixed terms  and monthly payments. We’ll eventually pay them off as long as we don’t miss any of our monthly payments, and we can pay them off more quickly if we make larger payments. Credit card companies, however, require us to make minimum payments that seem very low at first, but rise as we begin owing interest on our credit card debt. In this NerdWallet Article, we learned that we can pay a $5000 credit card balance, at 16 percent APR, in half the time simply by paying $150 a month instead of $100 a month. If we have multiple cards we can:


  • Use the Debt Avalanche method to pay off debt quickly by paying off the debt with the highest interest rate first, then use the money you save to ppay off progressively lower interest debt until it’s gone
  • Use the Debt Snowball method to produce quick wins by paying off the smallest balance first, then use the money you save to progressively pay off larger balances until it’s gone
  • Use the Debt Tornado method to destroy your debt by getting angry enough to do what ever you can to pay extra toward your debt until it’s gone


These methods are appropriate for people with moderate incomes and fair to good credit scores who simply want to pay off their debt more quickly.


Credit Counseling


Credit Counseling is a process, often offered by nonprofit organizations, where a credit counselor helps you to develop a budget and work with your lenders to develop a plan to pay off your debt. A credit counselor doesn’t focus on reducing the amount of money you owe, but they can help you to work with your lenders to reduce your interest rates and monthly payments to something that is manageable for you.


Credit counseling is appropriate for anyone, but may be especially beneficial to people who feel like they can’t do it alone.


Debt Consolidation


Debt consolidation is the process of paying off multiple high-interest debts using a lower-interest loan. Debt consolidation can quickly reduce your monthly payment and give you peace of mind by helping you know exactly when your debt will be fully paid off.


Debt consolidation is appropriate for people who have a good to excellent credit score and are able to qualify for the best interest rates. People with lower credit scores will need to work hard to increase their credit score using one of the methods above before they’ll be able to qualify for debt consolidation.


Debt Settlement


Debt settlement is a process where a lender accepts one large payment, typically 10 to 50 percent of the total loan balance, in exchange for forgiving your debt. Debt settlement is sometimes referred to as debt relief or debt adjustment.


When you begin working with a debt settlement company, they typically ask you to stop making payments on all of your debts and begin making a payment to them. When you’ve paid them enough, they begin offering your lenders money to forgive your debts. Lenders are not obligated to accept those offers, though some do. Others may choose to sue you and you’ll almost certainly receive harassing phone calls from collection agencies trying to collect on your debt.


Debt settlement may be appropriate for people who are unable to afford to pay off their debt. Debt settlement will damage your credit score, though, so it may not be appropriate unless your credit score is already poor.




Bankruptcy is a federal legal process that allows individuals or businesses to have their debts forgiven while providing some repayment to their lenders. Bankruptcy decisions are made by a federal bankruptcy judge. The judge’s decisions are carried out by an officer called a trustee who decides how your assets will be used to repay your lenders. Bankruptcy is typically used as a last resort and  will damage your credit score, so it may not be appropriate unless your credit score is already poor.


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