Pay off debt faster handwritten on memo and calculator.

How to get out of debt

The secret to any debt payoff strategy is to find ways to allocate more money to paying down principle. Basically, all effort to get out of debt must involve one or more of the following things:

  • Cut expenses
  • Increase income
  • Organize your debt payments
  • Cut the cost of the debt
  • Negotiate a lower debt amount

To successfully in paying off your debt, you must do at least one of these. More is better. 

How to get out of debt fast!

If you are interested in getting out of debt fast, you must be able to employ more than one debt reduction strategy at the same time. Getting out of debt fast will require you to do at least two, probably three, of the following things:

  • Drastically cut your expenses and put that money toward paying the loan with the highest interest rate
  • Find ways to earn more income through taking a second job, selling something, or monetizing a hobby and putting that money into paying down principal.
  • Organize your debt payments such that you are paying extra on the loans with the highest interest rate, or paying off the smallest loans first.
  • Restructure your debts. Sometimes you can only do this by negotiating with your lender, but you can also do this through debt consolidation or balance transfer strategies. The key is to decrease the amount you need to pay, lower the interest rate you are paying, or shorten the term of the loan. 

How much you can do more than one of these things will determine the speed at which you get out of debt. The more aggressive you can be in each of those categories, the faster it goes. 

How to pay off $10,000 in a year

Figuring out how to pay off $10,000 in debt in a single year is actually a math problem and a behavior problem. First, you need to figure out how much you need to pay each month in order to finish the payoff in twelve months. That calculation, of course, depends on the average interest rate of the debt. Based on interest rate, the following table tells you how much you would need to pay each month in order to pay off $10,000 in a year.

Average interest rate of $10,000 debtMonthly payment needed to be debt-free in 12 months

Understanding how much money you have to come up with is just the first step. Once you know what you will need to do to clear that debt, you can get to work on strategies for making more money and cutting expenses. 

How to pay off $20,000 in debt fast

Figuring out how to pay off a significant amount of personal debt, like $20,000, can feel impossible. But, the first step is to figure out how much money you will need to come up with in order to pay it off quickly. 

The APR for credit card debt in 2023 is currently between 15% and 20%. So, for this illustration, we will assume the $20,000 debt is at a 18% interest rate. 

Monthly paymentMonths to pay off $20,000 (years)
$200118 (9.8 years)
$30079 (6.6 years)
$40059 (4.9 years)
$50047 (3.9 years)
$60039 (3.25 years)
$70034 (2.8 years)
$80030 (2.5 years)
$97024 (2 years)
$2,00012 (1 year)

The way to pay $20,000 of consumer debt off quickly is to figure out how to maximize the monthly payment that can be made. The graph below illistrates this: 

You can see that it will take a very long time to pay off $20,000 if you can’t scrape together a meaningful monthly payment. In order to pay $20,000 off in two years, you will need to allocate $970 per month to the debt.

Once you know what your target is, you can concentrate on the strategies you will need to employ to come up with that money. It is likely going to require a mixture of expense reduction and finding new income. 

What is the best way to pay off debt?

The best way to payoff debt is the method that you can execute consistently. The key to paying off debt is to be consistent over time even when challenges come up. If you are not likely to have any significant emergencies come up, the Avalanche method saves the most money and can often accelerate your debt payoff, especially if you have higher-interest loans. The Snowball method gives a feeling of accomplishment and increases your resiliency in case other challenges come up. The simplest approach is to start with the loan that annoys you the most and pay that one off first.

In short, the best debt payoff strategy is the one that fits into your lifestyle, takes into account the type of debts you have, and can keep you motivated. Even if your strategy isn’t the best strategy for someone else. 

Three ways to get out of debt

The three most common strategies for getting out of debt are:

  1. The snowball method: pay off your smallest loan first. Once its paid off, allocate the previous payment amount to the next smallest. The snowball method involves growing payments akin to a snowball rolling downhill.
  2. The debt avalanche: put all your extra money toward paying off your most expensive loan to save yourself on interest expense. When that loan is paid off, move all the money you were paying toward the first loan and move it to the next most expensive loan. Your payments get bigger through debt payoff as well as decreased money spent on interest.
  3. Debt consolidation: pull all your expensive loans into a larger loan with a smaller interest rate which should lower your minimum monthly payment. Don’t decrease your payment, though, it just means you will be paying more than the minimum due and putting extra money towards your principal. 

How can I pay off my debts on low income?

One of the most difficult things to do is to pay off debts when you have low income. It is harder to cut out expenses because you are already frugal, so it feels like you have fewer options. The debt can feel overwhelming. In fact, many people in that situation avoid looking too closely at their financial situation. It feels impossible. 

Here are suggestions on how to pay off your debts when you have low income:

Do a full assessment of your debts and payments

It might be painful to face your financial situation, but the only way to make meaningful progress on getting out of debt is to understand where you are and what you will need to do. Your situation will often be worse by just blindly treading water. 

List all your income and expenses

This will help you understand what expenses are non-negotiable and what income you can rely on.

Recognize emergencies happen

One of the most common mistakes that people make when trying to get out of debt is to imagine a future where nothing will go wrong again. The reality is that car tires need to be replaced, people get sick, and things come up. Do what you can to put a little money aside (even if it’s just a little) for the things that might come up. It might not feel like much, but it helps to not get derailed when the unexpected comes up. 

Hold yourself accountable

One of the best ways to hold yourself accountable is to find someone you can be accountable to. It might be a spouse or a close friend, a sibling or a debt counselor. Whoever it is, it is nice to know someone is supporting you and that you can celebrate your victories with. 

Recognize the different kinds of progress

Many people who have a lot of debt also have a low credit score. Makes sense. Financial challenges often impact several different parts of your life. Why does that matter? Well, if you can prioritize improving your credit score (even if all you are accomplishing is paying your minimum payments), you will eventually qualify for cheaper forms of credit that can help you consolidate your loans and pay off your debts faster. Make sure you are acknowledging the different ways you are making progress. 

Look for additional income

It’s often easier said than done to tell someone to find more income. If it were that easy, wouldn’t we have already done it? Yes, and no. Sometimes we fail to realize that a single gig shift a month where you allocate that money to principal can have a huge long-term effect on your debts, even if it doesn’t feel meaningful. 

Consider consolidation

If you have high-cost forms of credit, consolidating your debts in a lower cost form of credit can be a great way to pay down your debts. Why? Well, if you can make the exact same payment every month, but have more of that money go toward principal and less to interest, you will pay off the loans quicker. While you don’t normally want to also extend out the length of the loan terms, doing so can also free up a little more breathing room in your budget. You can still pay extra every month, but it will give your monthly finances a little more resilience.

Seek out professional help

Non-profit debt consolidation organizations can often help people make meaningful progress on their debt. They have seen hundreds of examples and can tell you what might work for your particular situation. Non-profit organizations are especially helpful because they aren’t seeking to make a profit off of helping you. They are more likely to have your best interest at heart than a for-profit debt consolidation company. 

Negotiate with your creditors

Creditors want to get paid. They will often work with borrowers in order to make sure they are successful. One of the most common things you can negotiate is your interest rate, though few people ever ask their lenders about it. Each lender is different in what they can and will do to help distressed borrowers, but you never know what options there are until you reach out. 

Look into debt relief options

There are options available to people who truly struggle to pay off their debts. You really need to find a profession who can guide you on whether an option is right for you as well as the implications to your life. Credit counseling, debt consolidation, debt settlement, and even bankruptcy might be something to consider.

Does paying off debt raise your credit score?

As crazy as it might seem, paying off your debts may not actually raise your credit score. Why? Well, credit scores are very complicated and there are a lot of things going on. It would be impossible to say for sure exactly what effect a change in your financial situation will have on your credit score because other things change as well.

Example of when paying off debts could decrease credit score

If the only credit on your credit report is a personal loan that you have been paying off for four years, making the final payment means that the loan would come off your credit report. This would drop your average age of credit from four years to zero. Without an active account that is being paid your credit score will likely drop. 

Or you pay off your credit card and no longer make regular payments which are reported to the credit bureaus. Since payment history is the most important factor in your credit score, it’s possible that over time your credit score might erode because no payments are being reported. 

Example of when paying off debt could increase credit score

Paying off a credit card would decrease your credit utilization. Decreasing your revolving credit utilization will always be a good thing for your credit score.

Example of when paying off debt would not affect credit score at all

If the debts you are paying off do not report to the credit bureaus, paying them off will not help or hurt your credit score. Credit scores are only calculated against the data in your credit report. If it’s on your credit report, it isn’t being calculated in your credit score.

How to pay off debt in a year

When you are committed to getting out of debt, you want to do it quickly. Paying off your debts faster has a lot of benefits, not the least of which is peace of mind. Clearing out debt as fast as possible enables you to build assets, live a little more comfortably, and eliminate stress. So, it’s not uncommon for people to want to pay off their debt in a year. 

But, how do you pay off debt in a year? How do you go about building a plan? How can you know whether it is even possible? The following is a step-by-step plan for paying off your debt in a year:

  1. Do the math: You have to know how much you have to pay towards principal every month in order to clear all your debt in a year. It’s not enough to just “pay extra.” You’ve got to know how much extra you will have to pay in order to get there. 
  2. Determine your monthly payment: Your monthly payment number will be crucial. It will be the number you have to pay month-in-and-month-out. You have to be consistent in order to pay off your debt in a year. 
  3. Set a plan to make the payment: You’ve got to determine exactly how you are going to make sure the payment is made every month. If you can’t scrape up enough by cutting your expenses, you have to think about second jobs or selling items in order to keep on track. 
  4. Be consistent: If you are going to get out of debt in a year, you have to be consistent. And that consistency must start early. Through the magic of interest, not making your target payment amount in the early months will be harder to catch up later because you will incur interest expense on the part of the payment you wanted to make but didn’t. In other words, if you were supposed to make a $300 payment in the first month, but only made $200. You will need to make more than $400 the second month to make up for the incurred interest on the $100 you didn’t pay in month 1.

It is possible to pay off your debts in a year, but it will require planning, sacrifice, consistency, and motivation. As they say, “Plan your work and work the plan!”

How much is considered a lot of debt?

As of the end of 2022, Americans hold a whopping $16.51 trillion in debt, but there’s a lot of stuff in that number. Americans hold about $0.89 trillion in consumer debt which amounts to almost $27,000 per person. That excludes mortgages, student loans, and auto loans. 

How much debt, though, is considered a lot of debt for you? One answer could be “any amount of debt” is too much, but that is not often realistic. The better answer is that the amount of debt that is considered a lot–or too much debt–is if it is difficult to manage, interferes with your ability to build assets, or causes you stress. Only you can determine what that number is. But, like many people, the answer is usually “less than you currently have.”

How much debt is normal?

It is very difficult to determine the normal amount of debt for a person because people’s situations are so different. Do you mean the average amount of debt for people in the country? In that case, the credit bureau Experian says that Americans have an average of $96,371 in consumer debt. That’s a lot of debt! 

The following circumstances would change how much debt would be normal for you:

  • Total household income
  • The type of debt (e.g., credit card vs. federal student loans)
  • Recent divorce
  • Employment or job loss
  • The reasons for the debt (e.g., spending too much vs. unavoidable events)

Can debt be wiped out?

Debt doesn’t just naturally disappear. For debt to be wiped out, something would have to happen. You can sometimes negotiate with a lender or debt collector for a lower settlement amount, but doing so will hurt your credit score and the record of this will stay on your credit report for up to seven years. You can also declare bankruptcy, but that can be an expensive and lengthy process.

When people think that debt will be wiped out, they are thinking of the legal requirement that debts cannot appear on your credit report for more than seven years

What is the statute of limitations on a debt?

The statute of limitations is the legal length of time that a creditor or debt collector has the right to file a lawsuit to recover a debt. They are not allowed to sue for the debt unless they file within that time. Creditors and debt collectors try to collect on the debt and work with borrowers and usually will only resort to lawsuits if they are not making any progress. 

The statute of limitations on debt is generally between 3 and 6 years, but it is determined by state law and so will vary depending on where you live. For this reason, it is advisable to consult an attorney to understand your rights. 

What is the debt avalanche method for getting out of debt

The avalanche method is a plan for getting out of debt if one holds several different kinds of debt. The avalanche method says that you pay off your most expensive loan first and then take the money that you had been paying to that monthly payment and move it to the next most expensive loan. 

What is an example of the avalanche debt payoff strategy?

The following is an example of how the debt avalanche method of debt payoff would work. This person has a total of $13,500 of debt that they would like to pay off. It looks like this:

Originally borrowedAmount owedInterest rateMonths to payoffMonthly minimum payment
Personal loan 1$3,500$2,50072%15$279
Credit card 1$2,100$1,20024%27$55
Credit card 2$1,800$1,00032%24$56
Auto loan$11,000$8,00016%35$268
Personal loan 2$2,500$80036%7$148
Table listing example debts for a debt avalanche payoff strategy

You can see that their total debt of $13,500 requires a total minimum payment of $806 per month. The first thing to do with this is to order the debts based on the interest rate, putting the most expensive loans at the top:

Originally borrowedAmount owedInterest rateMonths to payoffMonthly minimum payment
Personal loan 1$3,500$2,50072%15$279
Personal loan 2$2,500$80036%7$148
Credit card 2$1,800$1,00032%24$56
Credit card 1$2,100$1,20024%27$55
Auto loan$11,000$8,00016%35$268
Table showing debts organized for a debt avalanche payoff strategy

Suppose this person could come up with $200 more than their minimum in order to allocate towards their debt. Based on the debt avalanche method, they would pay all their minimums so that they are never late and they would spend the additional $200 on Personal loan 1, because it has the highest interest rate. 

By putting $479 every month toward Personal loan 1, they would be able to pay the loan off in 9 months instead of 15 and they would save $597 in interest during that time. During this time, they paid off Personal loan 2 off as it came to term. 

After paying off both Personal loan 1 and Personal loan 2, they would be able to allocate the money they were paying against those two loans to Credit card 2 (since it had the highest interest rate of the remaining loans). They would be able to allocate the $279 from Personal loan 1, the $148 from Personal loan 2, and the $200 that they could come up with extra. This will allow them to pay off Credit card 2 in two months. Then they will roll its minimum payment into the lump sum allocated to the next loan.

You can see how the payments quickly avalanche into quicker and quicker payoff of the loans.   

Would I benefit from the avalanche method of debt payoff?

The avalanche method is most effective for people who have several different debts, at least one of which is an expensive form of credit.  This is because the debt avalanche payoff strategy is designed to save as much money on interest as possible and use those savings to pay down principle. If the interest rates across one’s debts is the same or all low, the avalanche method won’t be as advantageous.

What is the advantage of the debt avalanche method?

The basic premise of the avalanche method of debt payoff is that you prioritize your loans based on the interest rate. Paying off the most expensive loans first in order to save money and use those savings to pay down principal on your next most expensive loan. 

The reason that avalanche strategy works so effectively is that it increasingly saves you money as you pay a smaller and smaller percentage of your payment towards interest and instead towards principle. 

The avalanche method of debt payoff is the best way to minimize the money you spend on interest. 

What are the downsides of the debt avalanche method?

One of the downsides of the avalanche method of debt payoff is that it may not feel like you are making much progress. This happens a often when the most expensive debt is also the largest. For this reason, the avalanche method may be discouraging and not for everyone.

Another downside of the avalanche method of debt payoff is that it does nor prioritize flexibility. By focusing your attention on the highest cost debt, it may take you longer to eliminate the first debt. Once you’ve eliminated a monthly payment, you have more flexibility. You can then divert those funds to other emergencies should something come up.

What is the debt snowball method for getting out of debt?

The debt snowball method is a debt reduction strategy where the person pays off the smallest debt first. Then takes the money that they had been paying to that loan and use it to accelerate paying off the second-smallest debt. As the process continues, the person is able to contribute larger and larger payments towards principal until the debt payoff accelerates. 

What is an example of the debt snowball method?

The following is an example of how the debt snowball method of debt payoff would work. This person has a total of $13,500 of debt that they would like to pay off. It looks like this:

Originally borrowedAmount owedInterest rateMonths to payoffMonthly minimum payment
Personal loan 1$3,500$2,50036%16$207
Credit card 1$2,100$1,20020%29$50
Credit card 2$1,800$1,00016%30$39
Auto loan$11,000$8,0006%40$213
Personal loan 2$2,500$80012%8$118
Table showing debts for a debt snowball strategy

You can see that their total debt of $13,500 requires a total minimum payment of $627 per month. The first thing to do with this is to order the debts based on the interest rate. Put the debts with the smallest amount owed at the top:

Originally borrowedAmount owedInterest rateMonths to payoffMonthly minimum payment
Personal loan 2$2,500$80012%8$118
Credit card 2$1,800$1,00016%30$39
Credit card 1$2,100$1,20020%29$50
Personal loan 1$3,500$2,50036%16$207
Auto loan$11,000$8,0006%40$213
Table showing debts organized for a debt snowball strategy

Suppose this person could come up with $200 more than their minimum in order to allocate towards their debt. Based on the debt snowball method, they would pay all their minimums so that they are never late. Then they would pay the additional $200 on Personal loan 2, because it has the lowest current balance. 

By putting $318 every month toward personal loan 2, they would be able to pay the loan off in just 3 months! That’s 5 months early. They would be able to retire their first loan in only three months. Then they would allocate all $318 and add it to the $39 minimum on Credit card 2. At that point, they would drop the months to pay off from 27 months to 3 months! Within six months, two debts have been retired! The next one will be knocked out in two months. 

The snowball payment gets bigger with each debt paid and the payoff for each debt accelerates. It’s just like a snowball rolling down a mountain, getting bigger as it goes. 

What is the advantage of the debt snowball method?

The debt snowball method is especially effective for people who need to see progress to feel like they are improving. By eliminating your smallest debt first, gain sociological momentum to keep going. 

Another benefit of eliminating the smallest debt first is that you can eliminate a monthly payment. This gives your monthly finances a bit more flexibility in case an unexpected need comes up.

What is the downside of the debt snowball method?

The snowball method’s downside is potentially higher interest costs as you pay off lower balance loans first, not the most expensive ones.

Which is better, a debt snowball or debt avalanche?

Both the debt snowball and the debt avalanche are effective ways of getting out of debt. What makes one better than the other depends on your circumstances. Here are some basic principles that can help you choose:

  • If you have high-cost debt, the debt avalanche will save you more money on interest.
  • If you have a lot of small debts, the debt snowball will help you feel like you are making faster progress toward paying off your debt.
  • If you have similar sized debts, the debt avalanche will save you money and will help you pay the debts off faster. 
  • If you often experience unexpected expenses, the debt snowball will give you more flexibility over time in case of emergencies.
  • If you are the kind of person who needs to see progress to stay motivated, the debt snowball is designed to give more immediate satisfaction. 
  • If you have a steady, predictable income, the debt avalanche might be best for you. 

10 tips for getting out of debt faster

Here are 10 tips for paying your debt off faster:

  1. Always pay more than the minimum
  2. Split your monthly payment and pay twice a month
  3. Make a payment every paycheck
  4. Consolidate high-interest loans 
  5. Pick up a little extra income
  6. Pay off your most expensive loan first
  7. Cut back on expenses
  8. Change to a frugal lifestyle
  9. Downgrade your fixed expenses
  10.  Make a game of paying off your debts

Always pay more than the minimum 

Paying only the minimum won’t easily clear debt, particularly with credit cards where little goes to principal. Without paying more, credit card debt could last for years, even without adding charges.

Paying beyond the minimum directs extra money to the principal, reducing the total owed. Extra principal payments stop interest charges on that amount for the loan’s duration. Getting ahead on payments saves more interest in the long term.

Split your monthly payment into two so that you can pay twice a month and stay current

It may not seem like splitting your payment in half and paying twice a month will actually do much since you’re still only paying the minimum. However, what you’re actually doing is cutting down the accured interest by a couple of weeks. This is in effect making an extra principal payment before it’s needed. Over time doing this will slowly accelerate your payoff.

Make a payment every paycheck and not just once a month

Making a debt payment with every paycheck, like splitting your monthly payment, adds an extra yearly payment. This helps reduce the principal and lets you prioritize your debt payoff strategy by allocating income.

Consolidate your high cost loans into a loan that has a lower interest rate

High-interest loans often drain your resources, with most payments directed to interest. Consolidating them into a lower-interest loan allows more payment toward the principal.

However, this approach carries risks. When consolidating, avoid extending the loan term, which would prolong your debt. Also, watch out for the temptation to continue spending, particularly with credit card consolidation. Having available credit might lead to further spending, resulting in increased debt.

Pick up a little extra income on the side and devote that income to debt payoff

Let’s face it, if you had enough income you might not have gotten into debt in the first place. So, it’s easy to say increasing your income is going to be important to paying off your debts. That doesn’t make it any less true. 

Luckily, boosting your income isn’t solely about finding a new job or seeking a raise. The gig economy offers various ways to earn extra cash on the side. The crucial part is dedicating this additional income to paying off debts, avoiding the temptation to spend it on long-desired items.

Pay off your most expensive loan first

If you have several debts it is important to pay off the most expensive debt first. The most expensive is the one with the highest interest rate. In some circumstances a slightly higher interest rate isn’t going to make that much difference. But if you have a high interest loan, you are likely making a huge interest payment every month. The quicker you can pay that loan off the more your payments will go towards principal. This is the basis for the debt Avalanche strategy.

Cut back your expenses and allocate that money towards debt payoff

When you are working on getting out of debt, it is common to focus on your expenses. Too often, though, people fail to take the next step. When you cut back your expenses use the money you save to directly pay down your debts. 

It is important not just to use that extra savings in other forms of spending. You also get a psychological benefit when you can see that the sacrifices you are making are contributing to accomplishing the goal in front of you. It’s important to make that connection as clear as possible.

Make a lifestyle change that includes frugality

Short-term changes are manageable, but sustaining them long-term gets tougher. To conquer long-term debt, a lifestyle change is necessary. That means fundamentally rethinking your approach to money, spending, and consumption. If you begin to see frugality as a virtue in your life you are much more likely to sustain the changes needed. This will help you make the changes needed in order to free up more money towards paying down your debts.

Downgrade your fixed costs

It’s easy to talk about making your coffee at home and not going out to lunch in order to save money. But that’s unlikely to save enough money to make a significant dent in your debts. Far more likely is the need to downgrade your fixed expenses. For instance, it may be needed to move to a cheaper apartment for a period of time. Then you can allocate more of your income towards debt payoff. Another strategy is to downgrade your car. If you own your car outright, downgrading could free up a little bit of money that you could pay towards your debts. 

The key to downgrading your lifestyle is that it can have structural benefits over a longer period of time. It can help you get out of debt and stay out. Once you’re out of debt, if you find that you do have the money, you can always upgrade again.

Make it a game

If you liken financial progress to a dreaded dentist visit, you won’t enjoy or celebrate it. Viewing debts as conquerable lets you find satisfaction in your progress. Transforming debt payoff into a game with milestones can help you ‘level up.’ The challenge of paying off debts can either frustrate or inspire personal growth. Sometimes, a mindset shift can drive greater success.

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Jonathan Walker