Setting New Year’s resolutions in December is fun. The air is filled with the energy of the holiday season, and you might feel especially glad to put a difficult year behind you. But the reality of January rarely lives up to New Year’s Eve expectations. By February, our pledges have lost steam. 

Not this year. If you promised yourself to get out of debt in 2021, now is the time to recommit to the challenge. We’re here to help you figure out how to become debt-free in ways that work with your debt profile and lifestyle.

Choosing the Best Way to Get Out of Debt

There are a few schools of thought when it comes to debt. Fittingly enough for the season, different debt payment approaches tend to come with cold-weather nicknames. The “debt snowball” method advises to start by tackling the smallest debt balance first while making the minimum payments on other loans, so you get a motivation boost by crossing off a debt early. As you pay off more small debts, you have more and more extra cash to roll into getting rid of larger debt balances. In contrast, the “debt avalanche” approach recommends starting with the highest-interest debt to save more money on interest overall.

Both methods have their advantages and disadvantages. It comes down to whether you’re more motivated by paying off a small balance entirely, or attacking the debt that costs you the most in interest.

8 Types of Debt to Tackle in 2021

We think considering the kinds of debt you hold is important, too. Some forms of debt are easier to manage, while others follow predatory practices or can even result in jail time. We’ve ranked some common forms of debt from worst to best to help you plan which to pay off first.

1. Payday loan: Payday lenders promise an advance on your paycheck, but they’re notorious for predatory lending. They frequently charge interest rates of 400% or even higher, a practice designed to trap you in a debt cycle. Avoid these loans at all costs, and if you have payday loan debt, do whatever you can to pay it off now.
2. Tax debt: The 2020 tax season was confusing! Filing deadline changes and the stress of job loss and pandemic worries may have made it harder to get the job done. If you owe the IRS, though, it’s important to handle that debt quickly. Tax debt adds penalties and interest monthly, and if you avoid taxes too long, you could have your earnings garnished or even face prison for tax evasion.
3. Retail store credit card: A credit card at your favorite store can seem like a good idea at first, especially when you’re tempted by a discount at the cash register. But retail credit cards tend to come with high APR rates — many store cards range from 25.90-29.99% APR. If you have multiple retail store cards racking up debt, it might be worth considering closing the accounts once the balance is paid off. Close newer accounts and keep utilization as low as you can on your other credit cards to minimize the effect on your credit score.
4. Personal loan: Personal loans generally aren’t predatory the way payday loans are, but some have high interest rates. If personal loan funds are tempting you to spend above your means, you could develop unsustainable financial habits.
5. Major credit card: Many Americans rely on credit cards for typical expenses. Credit cards are one of the biggest sources of debt, but they aren’t inherently evil. Review the APR rates and rewards programs on your most-used cards. Keeping an older credit account can benefit your credit score, but you may get more perks from using cards strategically to maximize rewards. Most importantly, get in the habit of paying the full balance on time every month.
6. Car loan: A car is a depreciating asset, not an investment the way a home might be. That doesn’t make it a bad purchase, but it's smart to keep in mind that you buy a vehicle for the freedom it affords you now, not the value you may get for an eventual sale. For some families, buying a used car may be the best way to avoid an inflated purchase price. For others (especially if you’re not comfortable assessing a used car’s condition), other tactics like concentrating on car brands with the best longevity may work better.
7. Student loan: Part of the CARES Act for coronavirus relief included suspending payments and waiving interest on certain student loan debt until at least September 30, 2021. Many people are also interested to see what steps the government may take in 2021 to forgive some student loan balances.
8. Home loan: Most financial advisors agree that a mortgage or other home financing can fall under “good” debt. It’s still worth asking yourself if it makes sense to look for a refinancing option that could lower your interest rates and monthly payments, potentially allowing you to pay off the other forms of debt above.

How to Get Out of Debt Quickly

Your plan for how to become debt-free should involve short-term and long-term practices to improve your overall financial situation. A professional can help you tailor a debt management plan to fit your individual goals, but you can also get started by trying some of these methods to get out of debt faster and avoid taking on new debt.

Pay off debt in a lump sum

It can be hard to figure out how to get rid of credit card debt when you still rely on those same cards for everyday expenses. Paying the balance can turn into a three-steps-forward, two-steps-back shuffle. It’s demoralizing, and meanwhile interest keeps building.

Sometimes a lump payment can go a long way to revitalize your financial goals. If your credit card debt is low and you’re expecting a sizable tax refund, putting your tax refund or an end-of-year work bonus toward debt can put you much closer to a zero balance. Other times, you may need more help.

If you own a home, you may be able to tap into your home equity to pay off your existing debt without incurring even more debt. Specifically, a Home Value Investment can be a smart move for your financial health. A Home Value Investment provides funds upfront for a share in the future value of your home.  And because it’s an investment, not a debt vehicle, it can be a great option for people aiming to lower their debt-to-income (DTI) ratio and build good credit in 2021. Using your home equity wealth to pay off high-interest debt without adding to your DTI ratio can put you in a stronger place to make another essential purchase (e.g., replacing a car).  If you use those funds to pay off debt and reduce your debt to income ratio, you may see a corresponding improvement in your credit score – improving other financing options over time.