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Data from the Federal Reserve Bank of New York’s Household Debt and Credit Report shows that the average American is $52,940 in debt. This debt is a combination of mortgage, home equity, student loans, auto loans, personal loans and credit card debt. Being in debt causes additional stress, can impact personal relationships and can leave people unprepared and unable to pay if unexpected expenses come up, such as medical bills.
Additionally, it costs you money to be in debt. Every month you pay interest fees on your debt is more money coming out of your account without benefit to you.
Paying off debt quickly can help you feel financially secure, reduce stress, improve your credit score, open the doors to new financial opportunities and save you thousands in interest. Wondering how to pay off debt fast? Here are seven tips that will help you pay off your debt quicker and more efficiently.
1. Create a budget
When looking at any “how to pay off debt fast” plan, you’re almost always guaranteed to see the advice to build a budget. Ultimately, you can’t find the extra money to put toward your debt if you don’t understand your expenses.
There are many different ways to go about budgeting, and you can experiment to find the best way that works for you. Try to identify areas where you can cut back on spending, such as unnecessary subscriptions, dining out and more. Additionally, you’ll want to spend less on credit if possible. This way, you’re not incurring more debt as you try to pay off your existing debt.
One of the most popular budget setups is known as the 50/30/20 budget. You divide your budget so that 50 percent goes to your needs, 30 percent to your wants and 20 percent to your savings or paying off debt. Your needs are essential payments, such as mortgage or rent, food, utilities and transportation.
If your needs take up more than 50 percent of your budget, you need to reevaluate them or increase your income. For example, you may choose to get a roommate to lower your monthly rent or mortgage payment.
2. Pay more than the minimum
If you want to pay off debt fast, you’ll need to make more than just the minimum payment. Paying a debt off faster means you can avoid paying the full amount of interest on it. For example, let’s say you take out a $20,000 auto loan for a used vehicle with an interest rate of 5.27 percent and a loan period of 60 months. If you take the full 60 months to pay the loan, you’ll pay $2,794 in interest. Paying the loan off in 30 months instead can save you over a thousand dollars.
One way to pay more than the minimum toward your debt is to have a rule to always put “extra money” toward debt. This means that anytime you get money that’s not from your usual income stream(s)—such as birthday money or tax refunds—it goes toward your debt. This is money that isn’t accounted for in your budget, so you know you don’t need it to survive.
3. Refinance your loans
Many people are scared to refinance their loans. They don’t know how the process works, so they assume this option isn’t right for them. In reality, refinancing is often a great move if you have high-interest debt. When you refinance, you typically negotiate a lower interest rate with your lender. In exchange for that lower rate, your lender may require a slightly higher monthly payment.
Of course, make sure you understand all the terms and conditions of your refinancing. You’ll want to make sure you can handle the monthly payment, know all the fees and costs and know that it’s a financially smart move for you in the long run.
You’ll also have to qualify for refinancing as this isn’t an opportunity given to everyone. If you have poor credit, you may need to consider credit repair services so you can qualify for refinancing later on.
4. Try the debt snowball or debt avalanche method
If you have multiple sources of debt, you’ll want to have an approach on which debt to tackle first. There are two approaches to debt payoff: the debt snowball method and the debt avalanche method.
The debt snowball method—as the name implies—has you working from the smallest to the largest debt (like a growing snowball). For this approach, you list all your debt balances in order from smallest to largest. And regardless of interest rates, you start putting all your extra money into paying off the smallest debt first.
People opt for the debt snowball method mostly for psychological reasons. You feel great as you pay off each small debt, which gives you the motivation to continue. In comparison, let’s say you start tackling a $100,000 debt first. This enormous debt will take years to pay off, during which you might encounter debt fatigue and lose your motivation to continue.
The debt avalanche method has you list your debts in order of highest interest to lowest. This method pays off the debt with the highest interest first, so you pay less money in interest overall. While this is a financially sound approach that will save you money, you should be prepared for the fact that your “debt wins” might take a little longer with this method.
Note that with both of these methods, you still make the minimum payments on all your outstanding debts. These methods simply dictate where your extra money goes.
5. Make your payments more often
If you’ve ever taken out an auto loan or a mortgage, you know that you’re typically given options of payments as weekly, biweekly or monthly. Most people choose monthly payments, but more frequent payments will help you pay your debt faster. Frequent payments will help you pay less in interest and reduce the overall time of your loan term. If you can handle doing so, adjust your monthly payment to a biweekly or weekly payment.
6. Consider debt consolidation
If you have multiple debts, you should seriously consider whether debt consolidation is right for you. Debt consolidation allows you to combine all your debts with one lender. Your one lender gives you the money to pay off your other lenders, so you only have one large loan. Typically this option suits borrowers because the consolidated loan will have a lower interest rate than the majority of their other loans.
Additionally, you only have to focus on one payment per month. This allows you to have a clear view of your progress and reduces the risk of missed or late payments.
7. Use a balance transfer card
One option to pay off debt faster is to take advantage of a balance transfer card. These cards typically have a promotional rate of zero percent interest for a specific period (six months, one year, 18 months, etc.). During this time, you can make principal-only payments, saving yourself interest and making a significant dent in your debt.
However, it’s important to note that balance transfer cards typically come with a fee. You’ll want to account for this fee when evaluating if this option is good for you. Additionally, using a balance transfer card is pointless if you don’t take advantage of this time and actually pay down your principal.
Make a lasting change
As you work to pay down debt, make sure that you’ll stick to your new habits. You don’t want to pay off debt and get yourself into the same predicament again.
Additionally, make sure to reward yourself for your small wins every so often to keep your morale up. Paying off debt can be challenging, but taking steps in the right direction will eventually pay off. And if it all becomes too much for you, there are debt relief options you can look into.
In addition to not having debt, you’ll want to have strong credit so you can take advantage of financial opportunities when you need or want them (mortgage approvals, better interest rates, etc.). If your credit was hurt by the debt you were carrying, there are things you can do to help it as well. CreditRepair.com offers experienced credit repair services to help you audit your credit to identify inaccurate information and file disputes on your behalf. While you’re taking care of your debt, we can help you take care of your credit.
Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.
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