Paying off your debt fast comes with many short-term and long-term benefits. It can help you build strong credit over time with a positive payment history. It can save you money by reducing the amount of interest you pay over time. And it can create more room in your budget to reach your other financial goals.
In short, tackling your debt faster is worth the effort. Here’s how to pay off debt fast.
Understanding the Nature of Your Debt
Before you figure out how to pay off debt fast, you need to know where you currently stand.
Understanding the Different Types of Debt
There are different types of debt—and different ways to think about debt. Understanding these differences can help you create a debt repayment plan that fits your situation.
- High-interest vs. low-interest debt. There is no specific definition of what makes a debt high-interest or low-interest, but credit cards, personal loans, and some other types of debts tend to have higher interest rates, while mortgages, student loans, and some other types of debts tend to have lower interest rates.
- Secured vs. unsecured debt. Secured debts are tied to collateral that the lender can take if you fail to pay
—such as a mortgage that is tied to your home. Unsecured debt does not have any collateral associated with it. Credit cards are a common example of unsecured debt. - Revolving vs. installment debt. Credit cards and home equity lines of credit (HELOC) are common examples of revolving debts, a line of credit that can be used at the borrower’s discretion and paid back over no fixed timeline (as long as the monthly payment is made on time). Mortgages and auto loans are common examples of installment debts, in which the borrower receives one lump sum and must pay it down on a fixed repayment schedule over time until the balance reaches zero.
Understanding Your Financial Situation
Take the following steps to understand your financial situation:
- Create a list of all your debts. In the list, make sure to include crucial details including the name of the creditor, the amount you currently owe, the interest rate, the monthly payment amount and due date, and other important details.
- Calculate your total debt load. Add up the total amount you currently owe for every debt to calculate your total debt load.
- Check your credit report and credit score. Pull your credit reports and review them to make sure you didn’t miss any debts. You can also review your credit score to see where you currently stand and check your progress over time.
Effective Debt Payoff Strategies
Now that you have a full picture of your existing debts, you can choose a debt repayment strategy. We will cover two of the most popular strategies to pay off debt: the debt avalanche method and the debt snowball method.
Prioritizing High-Interest Debt (the Debt Avalanche Method)
With the debt avalanche method, you prioritize paying off debts with the highest interest first. By focusing on the debts that are accruing the most interest first, you can save hundreds (or even thousands) of dollars in the long run.
Look at your list of debts and put them in order from highest interest to lowest interest. Each month, focus on paying extra toward the debt with the highest interest while making minimum payments on the rest. Once that debt is paid off, you can move on to the next highest interest debt on the list and continue to pay off debts in that order.
The biggest advantage of the debt avalanche method is that it reduces the total amount of interest you pay over time. But the downside is that you may not stay as motivated as you might with another popular debt repayment strategy: the debt snowball method.
Prioritizing Smaller Debts (the Debt Snowball Method)
The debt snowball method prioritizes paying off smaller debts first. By focusing on smaller debts, you can start to knock out debt accounts faster, giving you some psychological wins and reducing the number of monthly payments you need to make.
Look at your list of debts and put them in order from smallest balance to largest balance. Each month, focus on paying extra toward the smallest debt you have, while making minimum payments on the rest. Once that debt is paid off, you can move on to the next smallest debt on the list and continue to pay off debts in that order.
The biggest advantage of the debt snowball method is that you focus on achieving small victories by paying off your minimal debts quickly, with that momentum accelerating over time as you work to tackle larger and larger debts.
Using Financial Tools to Pay Off Debt Fast
There are several financial tools and strategies you can use to pay off debt faster.
Balance Transfers
Credit card balance transfers involve moving your existing credit card debts onto a new balance transfer credit card with a special introductory low interest rate (some cards offer introductory rates as low as 0% APR for balance transfers). You will pay the low interest rate on the balance until the promotional period expires. After that time, the regular interest rate kicks in for any balance you have left over. You should focus on eliminating the debt before the promotional period ends.
Balance transfers are easy to set up and you can qualify for great introductory rates if you have good credit. The main disadvantage Is that you may have to pay a balance transfer fee to complete the transfer, as a percentage of the transfer amount. And if you don’t pay off the balance in the introductory period, you will end up paying higher interest on any balance that remains.
⭐️ Learn More: How Does a Balance Transfer Affect Your Credit?
Debt Consolidation Loans
Debt consolidation loans can combine multiple debts into a single loan. The lender will pay off your debts with the original creditors (or issue you a lump sum so you can pay the original creditors yourself) and set up a single fixed monthly payment for you to manage. Debt consolidation loans can only be used for unsecured debts, such as credit cards and personal loans with no collateral attached.
The biggest advantage of debt consolidation loans is that they combine your debts into a single monthly payment that is easy to track and puts you on a timeline for debt repayment. The downside is that you could end up paying more in interest over time or end up with a higher monthly payment if you aren’t careful and don’t review the loan terms.
Increasing Your Income for Faster Debt Payoff
Another strategy is to increase your income and put extra earnings toward your debts. There are several ways you could increase your pay:
- Start a side hustle. Look at side hustle opportunities to earn extra money on the side and put those earnings toward your debt.
- Sell assets. Selling smaller items, like unwanted home goods and jewelry, and larger items, like a second car or some unused property, can raise funds for debt repayment.
- Ask for a raise or promotion. Look for opportunities to advance your career, like asking for a raise after a major success at work or putting yourself up for a promotion when it becomes available.
Cutting Expenses to Free Up Cash
Another major way to focus on paying debts faster is to free up cash by budgeting and cutting expenses.
Create a Budget
Budgeting and tracking your spending can help you put extra money towards your debts. You can download a budgeting app or just create a simple spreadsheet to track your income and expenses. Plug in your income and then create a line item for every monthly expense you have. Subtract the outgoing cash flow from the incoming cash flow to find extra funds that can be allocated toward your debts.
Remember you should adjust your budget as your circumstances change. For example, you should adjust your monthly grocery expenses if you have a baby and your supermarket spending goes up. And you should adjust your income if you get a raise at work.
Having a budget will help you look for opportunities to reduce your spending and allocate more funds toward debt.
Reduce Monthly Bills
Look for opportunities to reduce your monthly bills:
- Cancel any unnecessary monthly subscriptions you have, such as streaming entertainment services you don’t use much.
- Look for ways to reduce your utility spending, such as turning things off when you leave your home, running your heating/air conditioning less, and using your dishwasher instead of washing dishes in the sink.
- Cook more meals at home and eat at restaurants less. Many delicious and filling meals can be made with affordable ingredients from the grocery store.
Hire a Professional
Struggling to reduce your debt on your own? It may be time to get help from a professional to create a plan and learn how to pay off debt fast.
Working with Financial Coaches
A good financial coach can help you create a financial action plan and provide ongoing support, which may include:
- Figuring out which debts to focus on paying first and which to prioritize less.
- Looking for ways to make your existing debts more manageable, such as debt consolidation or debt settlement.
- Helping you create a budget or examine your existing budget to look for debt payoff opportunities.
- Showing you how to pay off your debts in a way that benefits your credit score.
In addition, financial coaches can provide you with financial education resources to help you understand basic money strategies, debt management, credit, budgeting, retirement planning, and more. And they can regularly check in with you to ensure you are on track to pay off your debts.
⭐️ Related: 6 Signs Financial Coaching Is Right For You
Debt Management Plans
Debt management plans can help you access better terms and transition from several monthly payments to one, but they may require enrollment fees and ongoing service fees in exchange for managing your payments.
Understanding Debt Settlement
Debt settlement involves hiring companies that will negotiate a settlement with your creditors on your behalf to settle your debt for less than you owe (or you can negotiate with your creditors yourself). If you hire a company to settle your debts, you may be advised to stop making payments until an agreement is made.
The benefit is you could significantly reduce the amount you owe and pay off your debts faster. However, you may negatively impact your credit if you stop making payments while you wait for negotiations to take place. Remember, you will also owe taxes on any debts that get canceled.
Staying Debt-Free After Payoff
Debt management doesn’t stop after you pay off your debts. You need to manage your ongoing finances wisely to avoid getting in over your head.
Building a Strong Financial Foundation
Follow these steps to establish a strong financial foundation:
- Save an emergency fund. You can use an emergency fund to pay for unexpected expenses and avoid going into debt. Many experts recommend saving three to six months’ worth of expenses, but saving anything is better than saving nothing. Consider keeping your funds in a high-yield savings account, which earns more interest than a traditional savings account but is still highly accessible if you need fast access to cash.
- Maintain your budget. Don’t stop using your budget after you pay off your debt. Continue to track your income and monthly expenses and adjust as necessary. Make sure you’re prioritizing important expenses, like monthly bills, over discretionary spending.
- Monitor your credit. The better your credit, the better terms you can access when you take on future debts. Check your credit reports to make sure they contain fair and accurate information. Monitor your credit score to track your progress as time goes on.
- Avoid unnecessary debts. Debt isn’t inherently bad, as it can help you build credit and access the financial resources you need. But you should avoid taking on unnecessary debts, which can get you into hot water.
- Make your payments on time. The most important factor that makes up your credit score is payment history. Always pay your bills on time to maintain a strong credit score and stay in good standing with your creditors.
Final Thoughts
Paying off debt fast requires planning and commitment, and sometimes professional help. Understanding the current state of your debts, building an effective debt repayment plan, and looking for ways to devote extra funds towards your debts can help you pay off your debt fast.
Credit & Debt offers resources that can help you build a personalized plan for tackling your debt. Our financial coaches will explore options like balance transfers, debt consolidation, and debt management with you. You don’t have to go it alone. Take control of your finances today and contact Credit & Debt for a customized debt payoff plan.
