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Five New Ways to Get Out of Debt

Effective new solutions for a classic problem; choose the one that fits your life.

by Jean Chatzky

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Household debt is soaring again and if it continues to rise, it will hit levels by year’s end we haven’t seen since 2008. That’s right. We’ve racked up $12.29 trillion in credit card debt, auto loans, mortgages and personal loans, according to the Federal Reserve Bank of New York’s second quarter 2016 report—an amount oh-so-close to the peak $12.68 trillion the country hit in the third quarter of 2008, right before the financial crisis.

That raises two questions: Does this signal a problem for the economy in the same way it did almost a decade ago? And does it signal a problem for you?

Let’s answer these queries one by one. Looking first at the economy, no crisis seems to be looming. That’s because the cost to service consumer debt is a lot lower than it was the last time around. Short-term interest rates are still very close to zero, which means that although consumers have borrowed a lot, the monthly payments on those debts are fairly low as a slice of overall household income. Also, lenders tightened their underwriting standards after the 2008 crisis. So now most borrowers have better credit and the income to support their debts; in other words, they’re more likely to pay them back.

Your personal economy, however, is another story. According to a new survey from the National Foundation for Credit Counseling and the Boeing Employees Credit Union, 35 percent of households don’t pay off their credit card bills in full every month. That’s a sign that you’ve got more debt on your plate than is comfortable. There are others, including an inability to save 15 percent of your income for your future, a total debt-to-income ratio (divide your monthly payments by your monthly pay) of more than 36 percent and night sweats brought on by the Visa bill. If any of these sound familiar, it’s time to take action to repair the situation.

“An inability to save 15 percent of your income, a total debt-to-income ratio of more than 36 percent and night sweats brought on by the Visa bill: If any of these sound familiar, it’s time to take action.”

We’ve scoured the landscape for the very best solutions to paying down debt. It’s important to note: These methods all work if—and it’s a big if—you can get on board and stay on board. Paying off a mountain of debt is hard work. Just as some people find success with Weight Watchers and others with the 5:2 diet, you need a solution that’s a match for your personality and temperament. Here are five proven approaches to try:

1. Combine pay-down methods for a bigger bang. Winter storm metaphors are big in the debt-repayment world. You may have heard about two competing debt-repayment methods called the snowball and the avalanche. If you snowball (a method popularized by money guru and radio host Dave Ramsey), you stack your debts smallest to largest and pay them off in that order. The psychological boost you get from retiring the smallest debts very quickly keeps you revved up and moving forward.

If you avalanche, you stack your debts by interest rate—highest to lowest—and pay them off in that order. This is the fastest, cheapest way out of debt. But unless that highest-interest-rate debt is also a small one, you miss that dose of quick success.

A third approach, the debt blizzard, combines the two methods, explains Beverly Harzog, author of The Debt Escape Plan. You pay off your smallest debt first for a psychological kick-start, then switch to the avalanche, working down from your highest to lowest interest rate. “You start with a boost, then switch to the method where you save the most money,” she says.

2. Download an app to keep you on track. After years of writing about how to pay down debt, personal finance reporter Jackie Beck designed her own app. The Pay Off Debt app ($4.99 at the iTunes store; not available for Android yet) employs the snowball method; every time you pay off a debt you’re rewarded with a big blue PAID on the screen. There’s also a motivating (some might say stomach-turning) amortization schedule for each debt so you can see how much (or little) of your payment is going to principal versus interest.

It’s a good solution if you tend to obsess about your debts, as Beck herself did when paying off her student loans. “I was constantly thinking of things like, ‘If I sent off $15 a day, how much faster would I pay it off?’” she says. “I thought maybe other people want to obsess about it, too.” The feedback she’s gotten from her users indicates she was right on track. Her advice: “Pick a debt—any debt—and focus on that one until it’s gone. Then pick the next one.” (And note: If you’ve got an Android phone, try Debt Payoff Planner at a cost of $0.99.)

3. Find cheap—even free—fun. A big downside to being in the middle of a long debt-repayment cycle is that you’re constantly telling yourself not to spend, which equates with not doing a lot of things, says Fred Schebesta, co-founder of, a personal finance site. He suggests flipping this scenario on its head and trying to increase your actual engagement with life.

“If I just tell you not to spend money, that’s not going to work,” he says. “But if I tell you that and give you something to do that doesn’t involve spending money, [that works].” [SC1] For example? Finding a new way to exercise that doesn’t involve spending money, like walking or running outside, or getting together with a friend to watch a favorite movie that’s on TV rather than actually going to the movies. The key word: substitution. Find a free (or cheaper) replacement for the costlier outlays in your life. “It’s all about behavior and lifestyle adjustment,” he says. “That’s what’s going to change you.”

4. Discover “hidden” money you won’t miss. Many people struggling with debt feel unable to come up with any additional funds to throw against their debts, money that would enable them to get out of debt faster. My solution—and, by the way, the first suggestion of every expert interviewed for this story—is to track your spending long enough to help you find that additional money. But I realize that this is tedious, and many people simply don’t do it.

Enter Digit, a free app (available for both iOS and Android) that links with your checking account, figures out your spending patterns and applies an algorithm to determine how much you can save without missing it. The app automatically transfers that money into your Digit savings account, which you can transfer back into your checking account to make repayments anytime. “The basic principle is no different than automatically deducting money to go into a 401(k), says Charles Phelan, president and founder of “An app like Digit can give someone the discipline that they need, having the whole thing be out of sight, out of mind.”

5. Budget with real numbers. If you are willing to do just a little number crunching, Tiller can help make it painless. Like many other financial products, Tiller links to your checking and savings accounts as well as your credit cards. Then, every day, it pulls the information into a spreadsheet to show you where your money is going. It’s free for the first month, $5 thereafter (if you’re a student, it’s free for the first year).

Tiller has “revolutionized” her financial life, says Lauren Greutman, author of The Recovering Spender, who has paid off $40,000 in debt, mostly on credit cards, in about two years. “When people start budgeting, one of the biggest mistakes is starting with fabricated, imaginary numbers,” she says. “By using Tiller, you can see how much you’re spending, use those numbers to set an appropriate budget, stick to the budget and then start making cutbacks.” Then you can use the money you’re saving to dig yourself out of debt.

Best-selling author Jean Chatzky, who appears regularly on the Today show, is AARP’s financial ambassador.

With reporting by Kelly Hultgren and Hayden Field