How many of us are dreaming about paying off our debt? A 2017 study showed that nearly half of Americans carry $25,000 in debt and that 40% of those with debt spend up to half of their monthly income just making their payments.
Debt consumes lives, and it can take years to pay off. A study from the One Wisconsin Institute finds that it takes graduates of Wisconsin universities 19.7 years to pay off a bachelor’s degree and 23 years to pay off a graduate degree.
If you’re looking to get out from under your debt in less than 20-plus years, you’ll need a plan of action.
So how do you come up with that plan? That’s where I come in. I’m 100% debt-free after paying off a credit card while in college and my student loans within 3½ years after graduation. I’ve been in the debt payoff trenches myself, and I have a plan you can follow to pay off your own debt quicker.
Figure Out Your Total Debt Amount
The first step is to figure out where all your debts are and how much they are. Make a list of all your debts in order from highest to lowest. (I use an Excel spreadsheet.)
Organize your debts into different sections: student loans, credit cards, mortgage, medical, etc. Next to each loan, list the interest rate. Next to that, list the due dates of your monthly payments.
Now that everything is sorted, you should have a clear understanding of your monthly debt burden. You can see where you owe the most money and which interest rates are the highest. Getting organized is the first step in forming a payoff plan.
Understand How Interest Works
Knowledge is power, and that’s never more true than when it comes to your money. The next step is to understand the difference between your types of debt and their interest rates.
Different types of debt come with different types of interest rates. (Lenders like to keep us on our toes!)
Let’s say you have a credit card debt and student loan debt. Each of these types of debt falls into a different category.
Credit card debt is revolving debt. That means that the debt is open ended (you get more credit as soon as you pay back your debt) and comes with variable interest rates.
Student loan debt is fixed-payment term debt. Payments go first toward the interest of the debt so far accumulated and then apply to the principal. Once the debt is paid off, you are not automatically given more credit. Fixed-payment term debt is more like the traditional way we think of loans: You borrowed the money for a purpose and you pay it back.
Generally student loan interest accumulates daily. Credit card interest can accumulate daily or monthly — you’ll have to read the fine print in your agreement to see what is true for your card.
Know Your Payment Terms
Another factor that can fluctuate depending on the type of debt is the length of the loan, or the payment terms.
Student loans usually come with a set repayment plan. If you stick to the payments as scheduled, you should complete it within the scheduled time frame. Credit card debt is revolving debt. It’s open ended, and as you pay off debt, your available credit rises. You need to pay only the minimum amount each month, so the rest of your debt can stick around for an undefined amount of time.
Knowing your payment terms will keep your credit score high. You’ll want to meet the terms of any agreement you’ve signed. This keeps you in good legal and financial standing. Also, not paying on time could result in penalties from the lender and on your credit report.
Pay Off Your Debt Quicker
Now that all your homework is out of the way, you’re ready to take action on your debt! Here are four tactics you can use to pay off your debt faster.
1. Pick a payoff strategy. The single best thing you can do is be strategic about how you pay off your debt. Throwing money at your debt all willy-nilly doesn’t do you any favors. A more surgical approach will get you better results.
The two most popular payoff methods are the debt avalanche and the debt snowball. In each one, you make the minimum payments on most of your loans, while throwing all your extra payments towards one loan in particular.
The debt avalanche method says to pay off the highest interest debt first. The thought is that by eliminating your highest interest debt as soon as possible, you’ll save more money in the long run.
The debt snowball method dictates that you pay off the lowest balance debt first. This is recommended for those who do best seeing success quickly and for those who have several loans, one of which is significantly smaller than the others. Knock that small one out and get energized to knock out the rest!
2. Reduce your interest rates. If possible, see if you can lower your interest rates. Student loan lenders will often lower rates if you sign up for automatic withdrawal payments.
For credit card debt, call your card company and see if you can negotiate a lower interest rate. Sometimes threatening to close your account will get them to knock off a few interest points! Remember, credit card companies make their money off interest, so they may be a tough sell. This is a chance to flex your negotiating skills.
3. Make multiple payments. The more you can pay off per month, the less debt you’ll have. That’s simple math. What’s not so simple is understanding the intricacies of beating interest.
Interest that compounds daily can be beaten by resetting the interest with multiple monthly payments. Rather than letting the debt grow for 30–31 days between payments, make more payments each month. This cuts down on how much of your payment goes toward interest, which means more of it goes to the principle. And that means you’ll get out of debt quicker!
4. Consolidate that debt. One of the best ways to quickly get your debt paid off is by using peer-to-peer (P2P)lending. These services can help you pay off your debt at a lower interest rate in a shorter period of time.
Both of these services allow for unsecured debt loans of as much as $35,000 and rates that could be lower than 7%. Of course, the rate you’re offered will depend on your credit score and the purpose of the loan. Both companies offer three-year loans, but Lending Club will issue loans for up to five years, as well.
Paying off debt was easily the best thing I ever did for myself. My money is now totally my own. Having no monthly debt payments has made it easier to save and invest, and it’s been a huge stress relief. You can get out of debt quicker than you think — what it takes more than anything else is consistency. Just keep on paying down the debt, and the numbers will drop.
And once you’re on the way to paying off that debt? Well, it’s time to think about investing. But don’t worry — here at Investor Junkie, we’ve got your back on that, as well.