How to Pay Off Debt Fast: Personal Debt Tips and Strategies
The US consumer debt crisis is spiraling out of control, with more than $14 trillion owned. That’s more than the entire GDP of China and enough to cover the market capitalization of the 30 richest companies in the world and still have billions to spare.
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It’s staggering, and it’s not confined to a single generation. Millennials have less debt than Gen Xers and Baby Boomers, but only just, and by the time they reach their 40s and 50s, they are expected to be one of the most financially insecure generations ever.
The good news is that there are a multitude of ways you can pay off debt quickly and effortlessly. These methods won’t work for everyone, though, and they require some forethought, willpower, and dedication.
Strategies for Paying Off Debts Faster
Whether you have a mass of student loan debt, mounting credit card debt, or a heap of personal loans, there are a few debt repayment strategies and tips you can utilize to help you get back into the black.
Try a Debt Repayment Method
There are a few different methods you can use to repay debt quickly. These apply for student loan debt, credit card debt, and pretty much any type of non-mortgage debt. We have already covered two of the most popular methods in our guide, Debt Avalanche Method vs Debt Snowball Method, but here’s a brief rundown of these debt payoff strategies:
- Debt Snowball Method: Create a comprehensive list of the debts you owe. Put all funds you have toward the smallest balance while meeting the repayments on the other debts. Once that smaller debt has cleared, start throwing additional funds at the next smallest one. This will help you clear the debt quickly while reducing monthly outgoings.
- Debt Avalanche: The Debt Avalanche Method works similarly to the Debt Snowball Method outlined above, only instead of clearing the smallest debts first, you focus on the debts that have the highest interest rate. Use any money you have in an emergency fund but don’t acquire additional credit.
Lose the All or Nothing Attitude
We could just as easily tell you to stop spending so much, to give up expensive habits, or to prioritize your debts over your lavish lifestyle, but it’s best to focus on the crux of the matter. More often than not, this is a reluctance to accept the truth and to see debt as black or white, all or nothing—you either have it and are struggling, or you don’t and you’re free.
Lenders rely on this attitude, because they know that borrowers will do the absolute least that is required of them, whether that be paying only interest and no principal, or paying the minimum for years to come.
Understand that even the slightest effort on your part can make a massive difference to your long-term debt and you’ll massively improve your financial situation. Once you accept this then it’s time to:
- Give up smoking and stop drinking so much.
- Stop throwing money at lottery tickets, slot machines, and casino vacations.
- Limit how many times you eat out.
- Don’t be tempted into buying unnecessary items just because they’re on sale.
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- Drop the brand-name clothing and stop the shopping sprees.
Use Your Savings
If you’re keeping money aside for a holiday, ask yourself what’s more important, financial security and peace of mind, or a few weeks in the sun? If the money is held back for a rainy day, then wake up and smell the ozone, because that rain has been falling for a long time.
The same applies if you have money in a savings account or an investment account. Unless you have an incredibly generous provider and a whole heap of savings, you’re always going to lose more interest through debt than you will ever gain through savings.
Start seeing a dollar saved as a dollar earned and you’ll be more willing to cash those savings and use them to clear your debt.
Increase Monthly Repayments
If you take out a $10,000 loan and pay back $200 a month, how much do you think goes towards the actual balance?
$100, $150? In actual fact, just 10%, or $20, could go towards the principal, while the rest is interest.
That’s a disheartening statistic, but the good news is that as soon as you meet the minimum payment, all extra funds will go directly towards the principal. In the above scenario, an extra payment of just $20 could double your principal repayment and greatly reduce the time it takes to clear your debt.
The way that your monthly repayments are split will depend on the type of debt (student loan and personal loan debt differ from credit card and auto loan debt) as well as the age. The older it is, the more of your repayment will go towards the principal.
Use Unexpected Money to Clear Debt
You’ve budgeted carefully, you’ve been frugal, and you’ve realized that you can only just afford to cover the bare minimum and have nothing left over. Now what?
Firstly, keep on doing what you’re doing. It may seem like a bleak situation, but if you meet those minimums and don’t acquire new debt, you’ll escape eventually. Secondly, look to put all unexpected money towards your debt.
You may roll your eyes at such a suggestion, but you’d be surprised at how often you receive windfalls like this. These occur in the form of inheritance and tax rebates, but also legal wins, job bonuses, gifts, and even just finding a few bucks down an old sofa.
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Any extra money you get should go towards your debts, chipping away at the principal and taking you one step closer to complete financial freedom.
Try a Debt Consolidation Loan
A debt consolidation loan is one of the best options for debtors seeking to achieve financial freedom. It’s still a last-ditch option of sorts, but it won’t hurt your credit score as much as some of the other solutions and doesn’t require outside assistance.
Debt consolidation can be used to clear student loan debt, credit card debt, and personal loans. It involves acquiring a single large loan and then using it to pay off all other debts.
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Often recommended following (or as part of) a debt management program, it’s a great way to pay off debt fast.
Of course, you’ll still have the consolidation loan to clear, but unlike an accumulation of student loan and credit card debt, it won’t leave you at risk of major penalties, fees, and high-interest rates. You’ll have extra money in your pocket, extra points on your credit score, and a little extra spring in your step.
Try Debt Settlement
If the debt snowball or avalanche method fails, you don’t have a savings account or emergency fund, you can’t find any extra money, and you don’t have a good enough credit score for a debt consolidation loan, then debt settlement is one of the few remaining options.
Often geared towards consumers with large amounts of credit card debt, as well as those with delinquencies, debt settlement is a lengthy process that can impact your credit score but will ultimately get you out of debt within 4 years.
It’s not exactly the best way to pay off debt fast, but speed isn’t an option anymore if you’re struggling with all the tips outlined above.
A debt settlement expert will request that you deposit money into an account held by a secure third-party. They will then contact your credit card providers and offer them a settlement amount, one that is typically between 40% and 60% of the original debt. Once agreed, they’ll use the money in the third-party account, clear the debt, and then move onto the next credit card provider or lender.
It’s more effective with credit card debt than student loan debt or personal loan debt, but it’s a service that can be utilized for all forms.
Advantages of Paying Off Debts Faster
We mentioned that many debtors have an “all or nothing” attitude when it comes to debt. They focus on the now and ignore the future. With that in mind, just what are the benefits of clearing debt sooner rather than later, how can it improve your life and your prospects?
More Expendable Income and Time
Let’s imagine that you have a $20,000 credit card debt at a 26% APR. It’ll take you 95 months and cost you close to $27,000 in interest if you repay $500 a month. If, however, you use a windfall of $5,000 to take a chunk of that principal away, you’ll clear the debt in half the time and pay less than $9,500 in interest.
That’s a saving of $17,500 over several years and all from paying a little extra at the outset. Imagine what you could do with an extra $17,500. It’s a brand-new car, several vacations—a down payment for a house!
More money and more time mean you could retire early and enjoy yourself more when you would otherwise be stressing about money.
Debt causes stress, depression, anxiety—it’s a leading cause of stress-related illness and could trigger an early demise. Less debt means less stress, which could significantly improve your mental health.
You won’t need to worry about being awoken by the sound of persistent debt collectors or making a large purchase on a credit card, and you’ll never have to concern yourself with terms such as debt-to-income ratio and credit utilization ever again!
Better Job Prospects
Your credit score impacts many facets of your life, including your job prospects. If you have a bad score, you may be refused security clearance or struggle to get a job in the financial sector. It’s a bit of a Catch-22, but it’s something you don’t need to worry about once you clear your debt.
Not only can debt lead to stress and mental health problems, but it’s also a leading cause of back pain, migraines, and headaches. Recent surveys suggest that migraines are more common as debt escalates, with close to half of all serious debtors reporting migraines and cluster headaches.
Different Strategies for Different Debts
Different debts require different approaches. Credit card consolidation loans may help to clear other credit card debts, but they might not be the best solution for student loan debt and they certainly won’t help you to payoff your mortgage quickly!
Huge Credit Card Debt Balances
If you feel like you can no longer afford your monthly repayments and don’t have any extra income to clear the balance, then a consolidation loan may be needed. If this doesn’t work, there’s always debt settlement.
Lenders are always happy to work with borrowers if it increases their chances of getting paid. If you’re struggling to meet repayments and have missed a few, your account may be nearing collections, at which point it will be sold cheaply to a debt collector. At this point, the lender will be more receptive to a reduced settlement or a debt management plan.
Escalating Student Loan Debt
If your student loans are getting out of control, then look into student loan refinancing or request a debt management plan. There are also forgiveness programs aimed at those working in the public sector, although these are quite rare and won’t clear your debts entirely.
The easiest way to pay off your mortgage fast is to pay more of your balance every month. For the first few years of your mortgage close to 90% of your payment is wasted on interest and if you have a 30-year mortgage, it’ll take years before you start paying more towards the principal than the interest.
Make extra payments by splitting your monthly payment into a bi-weekly one. Over the course of the year, this will generate 13 payments instead of 12, which could shave a year or two off your total mortgage length. You can also seek to refinance your mortgage to get a better rate, increase monthly payments or put all extra money towards the mortgage.
Costly Auto Loans
In addition to increasing your monthly repayments and using windfalls to clear the balance, you can also try the following techniques to pay off car loans quickly:
- Cancel Add-ons: Dealers try to increase the cost of auto loan contracts by adding a host of extras onto the final price, including GAP waivers and extended warranties. You may not need all these and can cancel the ones you don’t need to reduce the cost of the loan.
- Drive Less: Consider walking or riding a bike for short journeys. You will save money on gas and can use this money to clear more of your debt each month. By the same token, you should rethink road trips and re-plan long commutes. Gas isn’t cheap.
- Don’t Rush into Repossession: Voluntary repossession is a good option if you have exhausted all others and can’t afford repayments, however, it’s not without its flaws. Not only will it hurt your credit score, but you may still be left with a bill. If the lender can’t recover all costs when they sell the vehicle, you’ll need to pay the difference.
FAQs About Paying Off Debt Quickly
Still have a few questions about clearing student loan, credit card, and personal loan debt? Take a look at this FAQ.
Where Can you Find Apps and Tools for Paying off Debt Faster?
There are a wealth of calculators, blog articles, and guides right here on PocketYourDollars. All these focus on debt and credit-related topics and include popular strategies and methods.
What are the Most Popular Apps?
The following apps can help you on your quest to clear your debt quickly:
- ChangED: Every time you make a purchase, this app rounds up to the nearest dollar and then adds that money to an FDIC-insured account. Once it reaches a fixed amount, the money will go towards your student loans. It’s like a virtual penny jar!
- Debt Free: A simple app that employs the Debt Snowball Method to help you clear your debts quickly.
- Credit Card Payoff: A useful app that can help you to manage your credit card debt and better understand how much is owed and how long it will take to clear. It’s also free!
- Mint: A free service that helps you to manage your money and to budget properly. It is available on desktop as well as iOS and Android.
- Unbury.Me: A simple and free application designed to help you escape debt via budgeting. This app employs both the Debt Avalanche and Debt Snowball techniques, letting the user choose between the two.
How Does Debt Affect Financial Prospects?
Debt damages your credit score, which in turn affects your chances of getting student loans, credit cards, auto loans, and mortgages. It’s possible for adolescent student loan debt and credit card debt to stay with you for years and prevent you from getting a mortgage in later life. It’s also possible for defaults, collections, and delinquencies to prevent you from getting loans and credit.
The same applies to debt consolidation, reverse mortgages, and even student loan refinancing. Everything that you do in your financial life is recorded on your credit report and can have a negative effect on your credit score. Keep this in mind the next time you consider taking out a large loan or acquiring a new credit card that you don’t really need.
How Does Debt Affect Your Life?
Debt can affect more than just your finances and your career. As discussed above, it can also cause physical pain and mental stress, making you depressed and anxious, increasing your risk of strokes and heart attacks. It makes you miserable, and in addition to lowering your life expectancy and decreasing your enjoyment of your day-to-day, it can also impact your relationships.
Studies show that couples that take on more debt than they can afford are significantly more likely to split-up. It leads to more arguments and fights and may prevent couples from getting married in the first place, with a 2018 study suggesting that student loan debt is influencing whether young adults get married or not.
How Can I Avoid Debt in the Future?
Budget every dollar, avoid excessive spending, kick bad and expensive habits sooner rather than later, and see credit as a last resort and not an easy-way-out. Adopt this mindset early on and you’ll learn to steer clear of debt and avoid falling into the trap that has lured the vast majority of American adults.
How Much can Budgeting Really Help me with my Debt?
Debt is often dismissed as a self-inflicted issue and in many cases it is. After all, it can be a direct result of drug addiction, problem gambling, and living above your means. However, there is often an underlying cause that at least partially absolves debtors of blame and in other instances (health crisis, unexpected unemployment, fraud) it’s unavoidable.
You should always budget properly, spend within your means, and adopt frugal spending habits, because while the money you save in the short-term may seem insignificant, it can be huge in the long term. If a 40-year old debtor has been smoking heavily since they were 20 years old, they’ve spent an average of between $25,000 and $40,000 on cigarettes.
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If they eat-out every week, they’ve spent over $50,000 in the same period. Add some lottery tickets to the mix and they could have spent in excess of $100,000 on superfluous items.
As much as they’d love to, they can’t go back in time and nip those habits in the bud, but if you’re young and are not yet burdened with debt, you can do your future-self a favor and prevent those losses from occurring.
The reason frugal living is so difficult to adopt is because we live in a consumeristic society and are always focused on the short-term. Only by taking a step back and looking at things over the long-haul can we see the true benefits and understand the virtues of penny-pinching.
The Bottom Line About Paying Debt Off Fast
There’s a multitude of ways you can pay off debt quickly, but each debt requires a slightly different approach and it’s important to remember that “quick” doesn’t mean “instant” and you will need to make some sacrifices. In some cases, you will also need to watch while your credit score takes a short-term hit, knowing that in the long-term it will improve, and you’ll be much better off for it.
The bad news is that most Americans remain in debt until the day they die, with close to 75% meeting their maker with some form of debt. The good news is that you now have all the tools and knowledge you need to be the exception and to stay debt-free throughout your life.