Debt repayment methods that help — and the ones that may cause trouble

For many Americans, getting out from under debt has become a major priority.

Federal Reserve consumer finance data show that the share of American families falling behind on loan payments rose sharply from the previous period, while the portion that was two months or more overdue also increased. At the same time, borrowing has become more expensive: mortgage rates have climbed, and gas prices are also significantly higher than a year earlier.

For people carrying credit card balances, personal loans and other consumer debt, interest can eat up money that might otherwise go to savings or everyday expenses. When payments mostly cover interest, it can take years to make meaningful progress on the principal.

There are several ways to speed up repayment. Some depend on budgeting and simple math. Others involve taking out new loans, moving balances or working with companies that say they can negotiate with creditors. But some debt payoff tactics can backfire if they are used the wrong way.

The debt avalanche and debt snowball methods are often used by people who struggle to reduce revolving debt such as credit cards, even when they have decent incomes. These methods add structure and discipline to repayment.

The avalanche method focuses on the debts with the highest interest rates, regardless of balance size. The goal is to reduce total interest paid while clearing the debt.

The process is straightforward: list all debts, rank them by annual percentage rate, and put extra money toward the most expensive one first.

While making minimum payments on every account, direct any additional funds to the debt with the highest rate. After that balance is eliminated, shift the extra money to the next-highest-rate debt, and continue until everything is repaid.

For example, a borrower with a $5,000 credit card balance at 25% APR, a $3,000 balance at 20% and a $2,000 balance at 15% would save the most by attacking the 25% card first. Because many card issuers calculate interest daily based on outstanding balances, paying down the highest-rate debt sooner can reduce future interest charges.

If a borrower keeps the same monthly repayment budget, the avalanche method usually lowers interest costs and can shorten the payoff timeline compared with targeting lower-rate debts first. The downside is that it can take a long time to wipe out a large high-interest balance, which may make progress feel slow.

The snowball method works differently. Instead of prioritizing interest rates, the borrower pays off the smallest balance first. Debts are listed from smallest to largest, with minimum payments made on all accounts and extra money aimed at the smallest one.

Once that balance is gone, the payment that had gone toward it is rolled into the next-smallest debt. The biggest benefit is psychological: closing out an account creates a visible win and reduces the number of bills due each month.

That sense of momentum can help people stick with their repayment plans, especially when the total debt load feels overwhelming. The drawback is cost, since ignoring interest rates can lead to more interest paid overall than with the avalanche approach.

Debt consolidation loans let borrowers roll several debts into one installment loan, usually with a fixed monthly payment and a set repayment schedule. If the new loan has a lower rate than the debts being replaced, consolidation can simplify payments and cut borrowing costs.

Still, a smaller monthly bill does not always mean a cheaper loan. The CFPB warns that some consolidation loans lower monthly payments by stretching repayment over a longer period, which can increase total interest even when the rate itself is lower.

For instance, consolidating $10,000 in credit card debt into a personal loan at 12% APR would cost about $332 per month over three years and generate roughly $1,957 in interest, assuming fixed terms and no extra fees. Stretching that same loan to five years would reduce the payment to about $222, but total interest would rise to about $3,347. That means roughly $110 in monthly cash flow would be saved, while about $1,390 more in interest would be paid.

Some personal loans also come with origination fees that raise borrowing costs. Those fees may be taken out of the loan proceeds or added to the amount borrowed. Others have variable rates or temporary introductory rates that later increase. Common mistakes include focusing only on the monthly payment, failing to shop around for the best rate and using home equity to finance credit card spending.

Balance transfer credit cards can also help reduce interest by moving debt to a card offering a temporary 0% APR. During the promotional period, payments go toward principal without added interest on the transferred amount. But most balance transfer offers include an upfront fee, usually a percentage of the amount moved.

For example, transferring $8,000 with a 3% fee would add $240, bringing the total balance to $8,240. If the card offers 0% interest for 18 months, the borrower would need to pay about $458 per month to erase the balance before the promotional window closes. If those payments cannot be maintained, the remaining balance generally reverts to the card’s standard APR once the offer ends.

Promotional zero or low-rate periods last only for a fixed time, and once they expire, the card typically returns to a rate closer to the market standard, or even higher. The smartest way to use a balance transfer card is to calculate whether the balance can be paid off in full before the introductory period ends. If the required payments are unaffordable, the transfer may not be worth it.

People who are having trouble making monthly payments may be able to get relief without taking out another loan or hiring a debt settlement company. In many cases, contacting creditors directly as soon as payments become difficult is better than letting the account go to collections.

Creditors usually prefer to recover the money, even if it takes longer than originally planned. They may be willing to lower interest rates, waive certain fees, reduce minimum payments or arrange a repayment plan that better fits a borrower’s finances. Some lenders may also change due dates so they align with payday. These options are not guaranteed, but asking can help.

The FTC says stopping payments can lead to late fees, added interest, collection efforts and damage to credit reports. Creditors may also sue borrowers while settlement discussions are still underway. Even though lenders are not required to accept a settlement or offer relief, not paying bills can create more charges and harm credit.

If a debt settlement company is used, borrowers should know that the FTC’s Telemarketing Sales Rule bars debt relief companies from collecting fees before they have successfully negotiated a customer’s debt and met other requirements. Even when settlements succeed, there can be further financial consequences. In some cases, forgiven debt may be treated as taxable income, depending on the borrower’s situation and available exclusions.

Consumers considering settlement should also understand that nonprofit credit counseling and debt management plans are not the same thing. Those programs generally aim to repay debt under negotiated terms rather than persuade creditors to forgive balances.