How to Pay Off Debt Faster

Learning how to pay off debt is one of the best things you can do for yourself, especially when it comes to credit cards.

The brutal cycle of debt can keep you from making important life steps, like buying a home or investing for retirement. Fortunately, you can learn how to pay off debt faster with several key strategies.

When you get out of debt, you start making progress toward your true financial goals and enjoying the life you envision.

How Does Debt Hold You Back?

If you don’t control it, credit card debt will hold you back in several ways.

Most obviously, debt restricts your cash flow, or the amount of money you have on hand to buy things or invest. When you have a lot of debt, you’ll have higher monthly bills as you pay it off. So you’ll have less money in your pocket to pay for, say, paying for a vacation or new clothes.

Importantly, a heavy debt load can negatively affect your credit score. And that can have lots of consequences. For one, you might not get approved for loans or credit cards. You may be denied a mortgage or car loan.

Understanding Your Credit Score

Your credit score, which is usually your FICO score, is a three-digit number that lenders use to determine whether you’d make a good borrower. Lenders use it to approve or deny you for a credit line or loan.

Your credit score can be affected by a number of factors, including how long you’ve had credit and your history of paying on time. Your debt load has one of the largest impacts on your score.

If you have a high credit utilization, that means you use a large amount of the credit available to you. For example, if you max out your credit cards, you’ll have a high credit utilization – and a lower credit score.

Having a lower credit score is a red flag to lenders. It shows them that, based on your past behavior and current situation, you would be less likely than other borrowers to pay back your loan. They see people with lower credit scores as a risk. If they offer you a loan, it would probably be with a higher interest rate, meaning you’d pay more in the long run.

What is ‘Healthy’ Debt?

Believe it or not, some debt is considered “healthy.” Fixed debt like mortgages are considered healthier than revolving debt like credit cards because they put you in a stronger financial position.

Fixed-rate loans have a set time period for repayment. With fixed loan, you can plan an end date for getting out of debt. Your minimum payments are the same each month.

Furthermore, fixed-rate loans like mortgages can help you acquire an asset. While you are paying interest to the bank, you are also making principal payments that pay for your property. At the end of the mortgage, you will have a valuable asset – your home.

So, in general, having debt like a mortgage is generally considered a positive move for your financial health. (Of course, paying off your mortgage quickly can also save you a substantial amount of money in interest.)

In contrast, revolving debt we have in credit cards is ongoing. You can spend up to the credit line as often as you’d like. Revolving debt can grow as the cost of interest of the loan compounds.

Essentially, revolving debt can have a snowball-like effect. Your minimum payments vary depending on the amount of balance you have. If you keep spending on your card, you may never pay it off.

8 Tips for How to Pay Off Debt Faster

Getting out of debt takes some work, but it can be done. You can pay off debt faster by focusing on these simple steps:

1. Stop Spending with Your Credit Cards.

The very first step you should take to pay off debt faster is to completely stop using your credit cards. When you buy more things, you only add to your debt load.

Put your credit cards in a place where you don’t use them — not in your wallet or purse. Some people keep them locked in a desk drawer or a safe. Some people even freeze their cards in ice.

You may be be tempted to cut your credit cards into small pieces to help you stop spending. But it usually makes more sense to keep your card intact. After all, you may need it for an emergency.

Don’t make excuses for using your credit card. Don’t tell yourself it’s OK to use your card if you put extra money toward your next credit card bill. Those spending habits usually backfire, and you’re likely to end up with even more debt.

2. Make Cuts in Your Personal Budget.

Honestly reviewing your budget can go a long way in helping you reduce debt.

Take some time to list your monthly expenses. Include both essential items like mortgage or rent payments and food, as well as non-essential items like entertainment or new clothes.

Then, tally up your total monthly income. Subtract your expenses from your income to get your “free cash flow,” which is money you can budget where you like. It’s money you can use to pay down your debt.

To increase your free cash flow, you can make some cuts in your spending. Review your expense list and scan for areas where you can cut back. First look at your non-essential spending, and consider scaling back until your debt is eliminated.

Then, consider whether you can reduce how much you spend on food, or cut back on your utilities bill.

Monitor your spending regularly and revisit your budget often. Personal finance apps like Mint.com can help keep you on track.

3. Pay More than the Minimum.

Making more than the minimum payment on a credit card bill is very effective at helping you get out of debt.

Not only does the extra money lower your overall balance, but it also reduces the total cost of interest you pay. You are eliminating interest that would grow and take longer to pay down.

The result is that with each extra payment, you are significantly picking up the pace of reducing your debt.

Here’s how:

4. Choose a Strategy for How to Pay Off Debt Faster

If you are paying more than the minimum and you have more than one credit card, it helps to have a specific strategy to follow. There are two popular strategies – the avalanche method and the snowball method.

Credit Card Arrow recommends the avalanche method, in which you put extra payments toward the credit card with the highest APR. That way, you save more money by reducing your interest costs more quickly.

Other people find the snowball method more successful. With this strategy, you pay down your credit cards with the smallest balances first. The last card you pay off will be the one with the highest amount of debt.

Many people find snowballing more motivating because they feel successful when they pay off a credit card.

If you put an equal amount of extra money toward each strategy, the avalanche method would help you pay off debt faster and save you more money. But, again, some people do benefit from the snowball method because they find it easier and more encouraging.

5. Consider Using a Balance Transfer Card

It may sound counter-intuitive to get a new credit card to help get you pay off debt faster, but it can work.

Used correctly, a new credit card with a lower interest can lower your monthly costs and the total amount you pay in interest. You can make more headway with reducing your debt with the same size payment.

Here’s how:

Credit cards that offer a 0% APR introductory term are among the best cards to use for a balance transfer. You can find 0% APR cards with terms for nearly two years. That means your balance would not grow and your debt would not snowball for that term, so you could pay off your debt faster.

Be aware that balance transfer cards can work against you if you continue to spend. Make a plan avoid growing your debt and use 0% APR cards to your advantage.

6. Make a Plan for Cash Windfalls

Even as you follow a tight budget, you may run into an unexpected windfall of cash. You could receive an inheritance, a big tax return or a bonus at work.

Make a tentative plan for what you’d do with some extra money. Make it a top priority to pay off debt faster.

Of course, your plan could include some “unnecessary spending,” but preparing to dedicate a surplus of funds to your debt is what you want.

7. Earn Extra Income with Side Hustles

Making extra money does take time and effort, but if you pay off your debt faster with extra money, it’s worth it.

If you have a full-time job, you might want to explore whether you can add a side hustle. The best side hustles give you a flexible schedule and quick cash.

For example, you might want to drive for Uber, pick up a few shifts at a part-time job, or find online, work-from-home options like freelance work.

8. Avoid Closing Your Credit Card Accounts

Finally, don’t close your credit card account, even if it seems like a good idea. When you pay off your credit card debt, you should still keep your card open.

This can help your credit score in two ways. First, part of your credit score is determined by the length of your credit history. So, you don’t want to close a credit card that you’ve had for a long time.

Second, your credit score is also determined by your credit utilization, or the percentage of your credit line that you’ve used up. If you have an open card with a clean line of credit, that greatly helps your credit utilization ratio.

Finally, it’s good to plan on not having a heavy credit card balance again, but keeping a credit card on hand is still a good idea in case of emergency. (Financial advisors recommend you save at least three months’ worth of expenses in a cash account as your main emergency fund.)

The Bottom Line

To pay off debt faster, you need to tackle it from many angles. The critical first step is to stop spending on all your credit cards.

Make sure to pay all minimum payments on time, and you can develop an effective way for putting extra payments toward your balance. Whether it is by making budget cuts, finding more income or using a balance transfer card, you can start making your money work toward cutting your debt down.

With each of these steps, you’ll get closer to the freedom of debt free living.