8 Debt Payoff Strategies Dave Ramsey Says to Avoid

Could these debt payoff strategies backfire on you?

Becoming debt-free is a great goal if you have high interest consumer debt, as your loans and credit cards could end up costing you a fortune. But is there a wrong way to get out of debt?

If you listen to Dave Ramsey, there is. In fact, there are eight popular payoff strategies Ramsey does not recommend. 

1. Debt consolidation

This technique involves getting a new personal loan or other type of loan and using it to pay off all that you currently owe, leaving you with just one monthly payment. If you can consolidate your debt at a lower rate than you are currently paying, it's actually a great technique.

However, Ramsey does not recommend it because he believes it will set you back on your payoff schedule. "This sounds like a good idea until you realize the life-span of your debt grows, which means you're in debt longer," he warned. "And the low interest rate that sounded so good at first usually goes up over time."

In reality, though, it all depends on the kind of consolidation loan you get. If you swap out credit cards with extremely low payments and a payoff time that's decades long for a personal loan you'll pay off in a few years that has a low fixed interest rate, it's really hard to see why that would be a bad thing. 

2. Debt settlement 

This involves settling your debt for less than you owe. You can usually do this only if you're behind on payments (which hurts your credit) and if you negotiate and get your creditors to agree. This option should be a last resort option to avoid bankruptcy, so Ramsey is right that it typically should be avoided except in limited circumstances. 

3. Debt avalanche

This is another one Ramsey is wrong about. A debt avalanche is an alternative to his debt snowball plan. Both of these plans dictate the order in which you repay debt. Ramsey's snowball approach suggests paying off your debt with the lowest balance first, then doing the next lowest balance and so on. The avalanche method instead involves starting with the loan with the highest rate. 

Ramsey explains his opposition simply. "The problem with this method is rooted in motivation," he said. "Remember: Paying off debt is less about math and more about behavior. With the debt avalanche, your first targeted debt might take a long time to pay off. But you need quick wins that encourage you to keep going! The debt avalanche takes too dang long to see real progress."

The problem is, you could end up paying a lot more if you have high interest debt with a big balance and you focus on paying off tons of cheaper loans first. There are other ways to stay motivated without costing yourself a fortune by paying off debt in an order that makes no sense. 

4. 401(k) loan

This involves borrowing against your retirement and Ramsey says not to do it unless you're facing bankruptcy. He's right. You will miss out on the growth your investments could have earned while you're paying back the loan and there's a high risk you could end up not paying back the loan and having it treated as a withdrawal, which would trigger a 10% penalty. 

5. Home equity loan

Ramsey advises against this approach because "a HELOC trades what you actually own of your home for even more debt -- and puts you at risk of losing your house if you can't pay back the loan on time."

Ramsey is right on this too. You would have to get a loan against your house and use the home as collateral if you took this approach. You don't want to trade unsecured debt (like credit card debt) for secured debt. There's a huge risk involved. 

6-8. Credit card balance transfers, personal loans, and loans from family and friends 

These are the remaining three payoff strategies Ramsey says to steer clear of. In each case, he suggests not doing this because you're trading one debt for another debt that could potentially be riskier. 

Again, though, this ignores the benefits of these strategies. A credit card balance transfer allows you to transfer the balance from a card with a high rate to one offering 0% interest for a period of time, while a personal loan can also be used to pay off credit card debt using a loan at a far lower rate. And a loan from friends and family might be free of interest entirely.

Ultimately, these strategies could make sense in your situation, as could the debt avalanche technique or a debt consolidation loan. So, while it's worth reading Ramsey's objections to these approaches, you shouldn't discount them outright. It's a better idea to instead research them carefully to see if they make sense for you.