To pay off debt, you should take time to assess your debt, review interest rates and terms, build a debt repayment strategy, review your budget to see how much you can pay, and set up recurring payments for your obligations.
As you look at your finances, you might realize that debt makes it challenging to get ahead. While a loan can help you with large purchases, paying it off quickly will reduce the total cost, make it possible to apply for a new loan and help put you in a better financial position. Learn how to pay off debt and enjoy more financial freedom.
How To Pay Off Debt
Make this the year of paying off debt and enjoying financial freedom like never before by following this guide. While the process might feel daunting depending on how many lines of credit you have open, the sooner you start, the less interest on your debt you’ll accumulate.
1. Assess Your Debt Load
Spend some time understanding your debt. Log into all accounts and review crucial information, including total owed, interest rates, and minimum payments. Write the details down in a spreadsheet so you can be strategic about which debt you pay down first. Include all kinds of debt, including revolving debt like credit cards and installment loans like student loans or your mortgage payment.
If you aren’t sure how to access this information, your credit report can help. Requesting your credit report from one of the three major credit bureaus will provide an overview of your outstanding debt and important details like your credit score and payment history. It also allows you to dispute inaccuracies on your report to protect your future borrowing abilities by achieving a good credit score.
2. Select a Debt Repayment Plan
You have many options for repaying your debt. Each has its pros and cons and works with various income types, budgeting methods, and financial situations.
Snowball Method
Using this method, you’ll first pay down debt with the smallest balance. This can help you build momentum and motivation to keep paying down your debt, hence the snowball metaphor. It can offer a sense of achievement as you quickly eliminate smaller debts and start seeing the impacts.
Debt Avalanche Method
Use the avalanche method to pay off the debt with the highest interest rates first. That way, you’ll save money on interest by setting your debt repayment priorities based on where you’re accumulating the greatest interest.
Debt Consolidation
You can roll your debt together using a debt consolidation loan. This method can help lower your interest rates and make the process more manageable by giving you one payment to make each month. That way, you can pay off your debt faster and watch the balance decrease to stay motivated. You have two options for debt consolidation: a 0% APR balance transfer credit card or a debt consolidation loan.
A balance transfer credit card might offer an introductory APR of 15-24 months depending on your selected card. That gives you time to aggressively pay down your debt. But depending on how much you have, that might not be long enough to pay it all down, and then you’ll be subject to that credit card’s interest rates once the intro offer expires.
Debt Settlement
Work with a debt settlement or relief company to help you negotiate your debt to a more reasonable payment. Creditors do not have to agree to a debt settlement plan, though. You can work with a third party to aid in debt settlement or complete the process yourself by calling your creditors and explaining your financial situation to hopefully find a good path forward.
Bankruptcy
When your debt is insurmountable and you need a fresh start, filing for bankruptcy might be the most realistic way to pay off your debt. This is only for extreme circumstances because it will tank your credit and make it challenging to access credit cards or loans for several years. You need to be ready to surrender your valuable possessions, such as your house and car, to pay off as much debt as possible. It makes for a challenging period of your life as you work to reestablish your credit but it can be a wise move when you’re in so deep you could never get out without assistance.
3. Set a Budget
The most effective way to pay down your debt is to become disciplined with budgeting. Track your expenses and learn where your money is going.
You’ll need a system that works for your finances and your thinking. The most popular budgeting system is the 50/30/20 budget, which allocates 50% of your income toward your needs, 30% toward paying down debt and putting money in savings and 20% toward wants. Using a budgeting app can help keep you honest and easily check how you’re doing.
4. Set Up Payments by Allocating Funds
Now that you know your debt obligations and have a baseline for how much money you have left in your budget each month to pay down your debt, you can set up recurring payments to repay your debt. Some people can put an extra $1,000 per month toward debt repayment, while others find their budget only allows an extra $100 monthly.
Your payments have to be realistic. Don’t be so aggressive in your debt repayment that you do nothing nice for yourself. This can lead to unhappiness, which might make you start spending above what you can afford in just a few months, putting you back in a bad debt situation. Plan for large expenses or special outings like concerts and events to fit within your monthly budget and debt repayment plan.
5. Look for Interest-saving Opportunities
Consider a balance transfer to a 0% APR credit card if your debt is mainly on credit cards. These cards offer an intro period with no interest for up to 24 months, depending on the card. The more you can save on interest while you pay down your debt, the faster you can pay it off. Be aware that balance transfer cards charge a balance transfer fee, often 3-5%.
Alternatively, you can opt for a personal loan with interest rates far lower than your credit card debts. If you have equity in your home, a home equity line of credit or home equity loan could help you get a better interest rate on your debt.
6. Track Your Progress
Revisit your debt-tracking spreadsheet regularly to see how you’re doing toward your goals. Checking in on your debt monthly will motivate you and allow you to celebrate your progress. Do something nice for yourself each time you reach a milestone, but be sure that nice thing fits within your budget. Try to gamify the process to make it fun and provide a sense of accomplishment.
Tips on How to Pay Off Debt Faster
Even with a foolproof method for paying off debt, the task can feel daunting. You might find that as you calculate your repayment timeline, you’re left paying down your debt for many years to come. Here are some ways to speed up the process of debt freedom.
1. Pay More than the Minimum Payment
You need to pay off the total amount you owe to reduce the interest you’re accruing on the loan. Look at your budget and see how much extra you can allocate to your debts to repay the loan faster. Adding an extra $25 per month to each debt payment can help lower the total interest you’ll pay over the life of the debt.
2. Make More Frequent Payments
Most debts and loans require monthly payments. But if you get paid weekly or biweekly, making more frequent payments will help you pay off the debt faster. If you’re allocating a set amount from each paycheck toward debt repayment, pay it right after you get paid instead of waiting until the end of the month.
3. Pay Off High-interest Debt First
Focus on the debt that is costing you the most first. That way, you can slow down the accumulation of additional debt from interest and start to put your money to work for you more effectively.
4. Lower Your Bills
Talk with your lender or creditor about ways to lower your bill on your payments with lower-interest debts as you work to pay off the high-interest debts. Once you get your debts to a manageable place, look into ways to lower other bills. Consider switching cellphone companies or negotiating a new rate. Look into your energy supplier to see if better rates are available elsewhere. Negotiate your rent and any membership fees.
For those monthly payments you can’t lower, you might eliminate the service, such as cable, the gym, or subscriptions. These are not necessary expenses, meaning you can live without them. Even if you only take a break for a year while focusing on debt repayment, this will be a wise move.
5. Increase Your Income
Ask for a raise at work or start a side hustle. Any opportunity you have to make a few hundred dollars more per month will help you pay down your debt and get to a more financially sound position. Make sure you’re allocating this new income to smart places to make the most of it.
6. Refinance Your Mortgage
Depending on your current mortgage interest rates, a mortgage refinance could help you get a lower rate and lower your payments. You’ll be recommitting to a new loan, which might mean paying on it for longer. But smaller payments will allow you to allocate those funds to the most important debt repayments first or to be more aggressive in putting additional principal toward your mortgage payments.
Reaching a Place of Financial Freedom
Paying off debts will feel amazing and give you newfound financial freedom. If you hadn’t been saving toward retirement due to your debt or felt you could never own a home or buy a new car, those might become options once you pay off your debt. You’ll be amazed at the opportunities and wiggle room in your budgets when less income goes toward debt repayments.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.