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Money Management

4 Steps to Get Out of Debt Faster

Whether you’re suffering from a severe financial crisis or simply don’t like the idea of owing money, there are strategies to help you get out of debt faster. From the order you pay off your loans, to finding more money in your budget, to lowering your interest rates, these four simple tips will get you to your goal of paying off debt faster than you might think.

1. Make a List of Your Outstanding Debt

Determining the total amount you owe is the first step you can take to get out of debt faster. Make a list of everything: your mortgage, car loan, credit card balances, student loans, and any other consumer loan you may have. If you aren’t sure about all your outstanding debts, you can check your credit report for free to see a list of open accounts. Just keep in mind those balances listed in your report may not be up-to-date. It’s best to check each individual account to see the most current outstanding balance.

Write down or use a spreadsheet to list the amounts owed, their interest rates, and the monthly/minimum payment amounts. Next, total up everything you owe on a monthly basis. This is the minimum amount you must pay each month to stay current on your debt payments. But if you want to get out of debt faster, you need to pay more than the minimum.

2. Set a Budget to Help You Get Out of Debt Faster

Once you have a list of your total outstanding debt, you need to define a budget that accounts for all your fixed expenses, bills, and minimum payments. If your expenses vary, or if you don’t pay close attention to your day-to-day spending, take a week to track it. The goal here is to identify unnecessary expenses that you can instead put toward getting out of debt faster.

As we mentioned in step 1, you need to pay more than the minimum payments to get out of debt faster. Setting a firm budget, cutting out unnecessary purchases, and applying those savings directly to your debts is a great way to get out of debt fast.

Keep in mind, your budget should also include putting funds toward savings, even while you’re focusing on paying things off.

3. Get Out of Debt Faster by Lowering Your Interest Rates

Review your loan and credit card interest rates. There could be opportunities to refinance or make a balance transfer to a lower-rate credit card. Ideally, you could transfer to one that offers a low-rate introductory period, which will buy you some time to pay down the credit card without incurring further debt from compound interest.

Whether you financed your car through a dealer, took out a payday loan, or haven’t refinanced your mortgage in a while, there could be opportunities to lower your rates and, therefore, your monthly payments. You could then apply your newly-found monthly savings toward getting out of debt faster.

Refinancing your loans and transferring credit card balances to a lower rate are some of the best ways to pay off your debt quickly and save you hundreds or even thousands of dollars in interest.

4. Develop a Debt Payoff Strategy

Once you’ve created your budget and refinanced where possible, it’s time to prioritize which loans or credit cards get paid off first. The rule of thumb to get out of debt faster is that you need to pay more than the minimum amount on all your debts. But with a limited amount of “extra” funds to apply to potentially several different debts, how do you go about it?

One popular strategy is to put most of the extra money toward the smallest debt balance first, regardless of interest rate. Once that debt is paid off, you add that amount to what you were already paying toward the next smallest loan or outstanding balance. Then, once that debt is paid off, you do the same for the next smallest amount and so on until you get to the biggest outstanding balance. This debt reduction approach is known as the snowball effect, and it’s extremely rewarding because you get quicker wins that motivate you to keep going.

Remember, you should continue putting money toward savings, even if it isn’t as much as you typically would. This way, you can borrow from that savings instead of charging the expense next time around.

Stick to Your Plan to Get Out of Debt Faster

Paying off your debt will likely take months and maybe even years. With such a long timeframe, it’s easy to see how people can lose focus and let their debt continue to pile up. Remember, if you carry a credit card balance, every day you don’t pay it off is a day that more money is added to what you owe. And the more payments you have each month, the less you can put toward savings. This can make it hard to break the cycle of revolving debt.

If you aren’t sure where to start, contact Orange County’s Credit Union for resources on financial wellness. Even if you think your credit is bad, or you’re stuck with what you’ve got, let us see what we can do to help you get out of debt faster. Remember, we’re with you all the way.