How To Pay Off Debt Fast: Strategies And Tips

Whether it’s your student loans, credit card debt or personal loans, the sooner you can pay it off, the more you can save in interest costs. Plus, the money you would have put toward debt can go toward other financial goals, such as saving for a new car or boosting your retirement savings.

Whatever your reason is for becoming debt-free, there are some best practices on how to pay off debt effectively. That way, you can reach your goals without neglecting your monthly bills or other aspects of your financial health.

Find Out How Much Debt You Have

The first step to get out of debt is figuring out how much of it you have. To begin, make a list of your monthly debt payments and how much you owe in total. You can use your monthly loan statements or sign in to your lender accounts to find out these numbers.

To help you determine a strategy to pay off the debt, mark down the interest rate next to each loan. Being able to see your total monthly debt payments and interest rate for each loan helps to see where you stand and where your money is going, as well as how soon you may be able to pay it off with your current income.

Understand Good Debt Vs. Bad Debt

The truth is that there isn’t one definition of what is considered “good” debt and “bad” debt. Rather, think of it as what kinds of debt will have a bigger detriment on your finances compared to others. Debt, while not fun, it’s a major factor in many people’s lives. Think about it: Is it possible to make a large purchase like your current house if you didn’t take out a loan?

Here are some ways to tell if the loan you have is considered “bad” debt:

• The minimum monthly payment is higher than your budget can handle, and may impede your ability to pay other loans or expenses
• Credit cards that have a high interest rate and you can only afford to make the minimum payment
• Loans with extremely high interest rates

It doesn’t matter if it’s your student loan, credit card or personal loans, if the debt hinders your financial health, it’s best to try and pay it off as soon as possible. There are plenty of techniques that can help you do so, which we’ll outline below.

Determine Your Debt-To-Income Ratio (DTI)

Your debt-to-income ratio, or DTI, compares your monthly debt payments to your monthly income and is the basic metric all lenders use to determine the amount of money you can borrow. It includes both revolving debt like credit cards and debts with installment payments like auto loans, mortgages and personal loans.

Understanding your DTI is helpful if you choose to consolidate your debts or refinance to help pay off your debt faster. The lower your DTI, the more it appears to lenders you are able to afford paying your loans and can take on another one.

To determine your DTI, take your total monthly loan payments and divide it by your monthly gross income. For instance, if your monthly gross income is $5,000 and your total monthly debt payments is $2,250, your DTI is 45%. Lenders have their own criteria as to how high of a DTI they’ll consider when assessing a borrower’s loan application.

Build A Budget

Creating a budget that helps you pay off debt is important so you know exactly where your money is going and can monitor the progress you’re making. It can also help you see if there’s any wiggle room for you to allocate more money toward your debt payments.

To ensure you’re current on all your debt payments, start by looking at your income. Then, subtract your total debt payments and monthly expenses. If you have money left over, you can figure out how to allocate the rest of your money. You can even look at your current spending to see if there is a way to cut back to put more toward your debt. The point being, knowing where your money is coming or going will help you create a plan to move you toward financial health.

6 Strategies To Pay Off Debt Fast

Once you’re aware of your financial situation, you can try any of the following strategies to help you pay off debt fast.

1. Increase Your Income

The more money you have to put toward debt, the higher the chances you’ll pay it off faster. You can decide where to put the extra money you earn, whether it’s toward your personal loans or credit cards.

Some ways you can increase your income include taking extra shifts at work, negotiating for a higher salary at your current job or starting a side business. If you have the means, you can also consider taking on a second part-time job temporarily to increase your income. 

2. Spend Less

The less you can spend, the more of that money can go toward your debts. To see where you may be able to cut back, look at your current spending to see any areas you can tackle. For instance, you can consider cutting back on eating out or unused subscriptions – Rocket Money^SM makes it easy to see all your spending in one place, and they’ll even help you cancel your subscriptions. Keep in mind that it’s not useful to totally cut back on all nice to haves – doing so can cause you to rebel and spend more, which defeats the purpose.

3. Tackle Highest-Interest Debt First

Paying off the debt with the highest interest first can help you save money over time by paying less in interest. This method is also referred to as the debt avalanche method, where you make more than the minimum payment toward your highest-interest debt, and make sure you stay current for all other ones. Once the highest-interest debt is paid off, you take the next highest-interest, and so forth until they’re all paid off.

4. Prioritize Your Highest Monthly Payment

If you’re looking to get approved for a loan in the near future, one thing you can do is work toward paying off the debt with the highest monthly payment, also known as the snowball method. The key reason for this is that DTI is based upon monthly payments, so any big amount you can eliminate from your monthly debt reporting will be extremely beneficial.

The downside of this is that you might end up paying more in interest if you have balances that include a higher financing charge.

If you decide to go this route, you’ll start with the smallest balance and then put as much money as you can toward it in order to pay off the loan while keeping current on all other debt. Once that’s paid off, you move on to the next largest balance and your payoff journey keeps gathering momentum and eating up more debt just like a snowball rolling downhill.

5. Consolidate Your Debts

Debt consolidation is where you take out a new loan and use the proceeds to pay off your current ones and you’re left with one loan payment. The main advantage is that it simplifies your payments. Plus, if you get approved for a debt consolidation loan with a lower interest rate, you can save money on interest charges and have a lower monthly payment.

6. Consider Debt Relief

You may be able to call your creditors yourself and ask if there is some form of debt relief program you can take advantage of, or you can enlist the help of credit counseling agencies. Many of these are nonprofit organization are designed to help you create a debt management plan so that you can implement a strategy that works for you. Be wary of debt settlement companies that offer to negotiate with your lenders on your behalf. Many may ask for upfront fees or won’t deliver on services it promises.

Debt Repayment FAQs

Still have questions. Here are two commonly asked questions on paying off debt.

How Do I Stay Out Of Debt?

You can stay out of debt by not taking on any new debt unless absolutely necessary, making sure your budget helps you meet your monthly financial obligations and setting enough aside in savings that you can reach your financial goals, as well as tap into in case of unexpected circumstances. If you need to take on more debts, you can save yourself some money in the long run by improving your credit score and ensuring you can make consistent payments each month.

How Does My Debt Affect My Credit Score?

Your debt can affect your payment history – positively if you make on-time payments or negatively if you don’t, or your debt goes to collections. It could also affect your credit utilization – the percentage you’re using of your total revolving credit accounts – as you pay it down.

The Bottom Line: Paying Off Debt Should Be One Of Your Financial Goals

Paying off your debt is one of the best ways to be financially healthy. It can have plenty of benefits such as improving your credit score and freeing up money to pursue other financial goals such as saving for retirement.

Paying off debt can seem hard, but you don’t have to do it alone. Download the Rocket Money app to help you negotiate lower debt payments.