How to pay off debt fast in 8 simple steps
Paying off debt doesn't have to be complicated.
Contributing Writer at Tally
April 1, 2020
When you have debts to pay, it might be difficult to see the light at the end of the repayment tunnel. Don't get discouraged, though. With the right debt repayment plan, you can pay off your credit cards, personal loans, car loans or student loans with relative ease. It just takes planning and follow-through.
We’ll show you how to pay off debt in eight steps with some helpful tips and tools along the way. Here we go.
1. Stop racking up more debt
The first step to becoming debt-free is to stop accumulating debt. Curb your temptation to swipe by putting all your credit cards in one secure location where you can’t easily access them.
If you struggle with putting down your credit cards, you may want to entrust them to someone who knows about your debt-free goal.
To keep yourself from taking on new loans and other debt, consider freezing your credit. You can do it for free through all three credit bureaus: Equifax, Experian and Transunion. A credit freeze will prevent lenders from pulling your credit report, thereby preventing you from taking on more debt.
Freezing your credit is not a 100% surefire way to keep you from accumulating more debt, as you can always unfreeze it on demand. Still, it’s a strong reminder of your goals and can act as a deterrent.
2. Organize and calculate all your debts
Without examining all your debts, you can’t get a full financial picture. Make a list of every debt you owe, including the creditor, your monthly payment, the interest rate and total balance. The list should include personal loans, credit card debt, student loans and everything in between. Organize your debts from the highest interest rate to the lowest and use the balance as a tie-breaker if needed.
Add up all your minimum monthly payments and the total balances. These numbers will become instrumental in your budgeting and will help you calculate when you'll be debt-free.
3. Lower your credit card interest rates
Because interest can lengthen the amount of time it takes to pay off your debt, a crucial step to becoming debt-free faster is to lower your credit card rates. There are a few ways to accomplish this.
Negotiate interest rates
Unlike student loans, car loans and other personal loans that typically have fixed terms, credit cards sometimes have more flexible terms you can negotiate.
The most significant impact you can make is adjusting your annual percentage rate (APR). A lower APR can reduce the time it takes to get out of debt and the total amount of interest you pay.
To negotiate your credit card interest rate, call the customer service number on the back of the card and request a lower rate. While a lower rate is not guaranteed, there’s a good chance the credit card representative will do what they can to help.
Use a 0% balance transfer offer
Credit card companies are constantly vying for your business, and one way they attract new customers is by offering 0% interest balance transfers.
When you sign up for a balance transfer credit card, you transfer a balance from an existing card to the new card with 0% interest for a fixed term. This term can range from just a few months to well over a year.
Having a 0% interest rate can make a significant difference in your debt repayment time frame and the amount you repay. However, these credit cards generally charge a 3-4% balance transfer fee.
For example, if you transfer $1,000 to a 0% balance transfer card, you'll incur a $30-$40 fee. In most cases, this fee is worth it when compared to what you’ll be saving in interest. Do the math to make sure it's the best option.
Consider a new line of credit
A line of credit is one way to get out of debt, save money and simplify your repayment plan. A credit line can give you access to lower-interest funds to pay off your high-interest credit cards. Because this is a reusable line of credit, you can pay off multiple debts with one credit line.
For example, if you had a $10,000 line of credit at 10% interest and $20,000 in credit card debt at 25% interest, you would use the line of credit to pay off $10,000 of your credit card debt and leave the remaining $10,000 on the card.
As you pay down the $10,000 line of credit, you would roll more of the credit card balance onto the line of credit until you pay off the credit card and line of credit.
The Tally line of credit goes a step further by also managing payments for your remaining credit cards. You make only one monthly payment for all your credit cards, and Tally handles the rest. Plus, you never have to worry about late payments (or late fees).
Consider a debt consolidation loan
If you have a lot of high-interest debt or multiple monthly payments to manage, a debt consolidation loan may help.
These personal loans pay off all your existing debt, leaving you with just one monthly payment for a fixed term. In general, a debt consolidation loan will also result in a lower interest rate, so you can also save money throughout the repayment term.
When looking at debt consolidation loans, keep two things in mind. First, they often require a good credit score to get approved. Second, keep an eye on the fees. Some loans require hefty origination fees that can cost you more than the interest on the debts you're paying off.
4. Create a monthly budget
List all your other monthly expenses, such as groceries, subscriptions, insurance, rent, utilities and other costs. Leave no stone unturned, as one overlooked expense can throw a wrench into your debt repayment plan.
Add all your monthly expenses to your minimum monthly debt payments to create your monthly budget. Then, subtract that from your monthly take-home income. If you have a cash surplus, great — that’s extra money to pay more than the monthly minimums on your credit cards and become debt-free even faster.
If you don't have a surplus or have a negative balance remaining, don't panic. You can make adjustments to your budget by cutting unnecessary expenses or increasing your income.
5. Cut unnecessary expenses
If you lack room in your budget to make extra payments on your debts, cut nonessential items, such as subscriptions or cable TV. You can also consider trimming your cell phone bill by switching to a more affordable plan.
After making all the cuts you can, recalculate your budget and see where you stand. If there’s still not enough extra money to pay more on your debts, consider making extra money on the side.
6. Find a side hustle
Rather than going through the time-consuming steps of a traditional job hunt, you can quickly sign up for one of the many on-demand side gigs available today.
Whether it’s a job as an Uber or Lyft driver, Postmates delivery person, personal grocery shopper or any of the other on-demand side hustles, these jobs can help you make extra cash when it's convenient for you.
Even if you run a cash surplus in your budget, you may want to consider a side gig as this extra income can help you reach your debt-free goals faster.
7. Set your debt-free plan
Paying off debt requires a careful plan. You must also consider your personality when aiming to become debt-free. For example, if you respond well to small wins as motivation, you may prefer the debt snowball method. But if you want to get out of debt as fast as possible, use the debt avalanche approach.
Most personal finance experts view the debt avalanche as the best way to pay off debt. It prioritizes the highest interest rates and balances, thereby saving you more money overall.
Putting a priority on the highest balances means it can take some time before you pay off your first debt. Some people find this lack of a quick win to be disheartening, and they may abandon their goals.
However, Tally is an easy and effective way to follow the debt avalanche method while keeping track of your balances, APRs and due dates. Tally is an automated debt manager that adapts to your needs, so you can pay off your credit cards without feeling crunched.
Instead of prioritizing interest rates and high balances, this debt repayment plan pays off the smallest balances first, giving you those small victories to stay motivated about your debt-free goals.
The downside to the debt snowball method is that your total interest paid throughout the plan will be significantly higher than on the debt avalanche approach. This is because you’re paying only the minimum payment on high-balance, high-interest debts while you focus on the smallest balances first.
8. Execute your plan
With your debt repayment plan in place, all that's left to do is execute it.
Stick to the plan you choose and watch your balances drop. If you want to make things even easier and are financially secure enough to handle it, consider automating your monthly payments. You can do this through the lender, the bill pay system at your bank or an app like Tally.
When executing your debt repayment plan, remember that this can be a long journey, and there are bound to be a few detours along the way. If you run into an issue and finances get tight or you fall off the debt-free wagon, it's OK. Pick up where you let off and get back on the path.
Take the first step to being debt-free
By following these simple steps, you can become debt-free without feeling overwhelmed by the process. You can even customize your debt-repayment plan to fit your personality and lifestyle, making the process more comfortable. Once you start the process, you’ll be one step closer to becoming free from debt.