Bad debt is a problem that many individuals encounter on a regular basis and becomes an even bigger issue during a recession with rising interest rates because you don’t want to be in a position where your employment could be at risk and you’re still required to pay down this debt which could escalate with any outstanding balances. Having bad debt, whether it’s from credit card debt, student loans, or a mortgage, may be a major source of stress and anxiety. However, there are various practical debt reduction tactics that we will review in this post below on how to pay off debt quickly:
1. Create a budget and lower expenses
Making a budget is the first step in quickly lowering debt. Creating a budget may not sound like a debt reduction strategy, but on the contrary, it is absolutely the foundation in understanding your overall debt situation. Once you create a “P&L” of your monthly income and expenses, this will enable you to identify opportunities to reduce spending and allocate more funds to paying off your debt. Beyond your salary from work, please make sure you include any other income sources (e.g., side hustles, dividends or interest income, rental income). For expenses, the most common categories in a budget include:
- Housing (rent/mortgage, utilities, insurance)
- Transportation (car payment, fuel, tolls, public transportation)
- Groceries
- Clothing
- Medical/healthcare (insurance, copays, medications)
- Debt payments (credit cards, loans)
- Entertainment (eating out, movies, streaming subscriptions, hobbies)
- Savings
- Childcare/education
- Personal care (haircuts, gym memberships)
- Vacations
If you have multiple credit cards and bank accounts, as tedious as it is, make sure you don’t overlook any expenses that could be deducted from your other bank accounts or credit cards. Finally, once you’ve developed a comprehensive budget, look for places where you may make savings once you have a clear picture of your money. Classify your expenses into “needs” vs. “wants” and this may help highlight opportunities to discontinue subscriptions, cut back on eating out, or investigate ways to lower your electricity costs.
2. Prioritize your debts (aka The Avalanche Method)
Prioritizing which debts to pay off first as well as developing a disciplined payment plan is crucial for success. Most people struggle with debt because they do not have a disciplined payment plan, even if they are well-intentioned in paying off this debt. They either don’t have enough income because of episodic “surprise” expenses or they are overwhelmed with the amount of debt and have to cherry pick which debt payments to make. Consider focusing on paying off the debt with the highest interest rate first especially if it’s a variable interest rate, also commonly referred to as the “Avalanche Method”. The debt avalanche method of debt repayment has the benefit of reducing the amount of interest you pay while working toward debt freedom. Because less interest accrues, it also shortens the time it takes to pay off debt, assuming continuous payments. Due to lenders’ use of compound interest rates, interest is added to these debts. The frequency of compounding determines the pace at which compound interest accumulates; the more compounding periods, the higher the compound interest. While interest on loans might compound monthly, semi-annually, or annually, it typically compounds daily on credit card accounts.
With the Fed expected to continue to increase the Fed Funds rate over the next few months, any unpaid balance of high interest debt could accelerate your owed payments to be even higher! This could create a significant drag on your savings and investments. By the way, with higher interest rates, your stocks are likely to continue to experience pain as well and therefore, any excess cash will be better allocated towards paying down your debt. As discussed in our prior post, this is a guaranteed 20%+ ROI!
Consider using any work bonus, tax refunds or windfalls in making a lump sum payment to pay down the balance and any interest owed as quickly as possible.
3. Use the debt snowball method
As an alternative approach to the “Avalanche Method”, the debt snowball approach is a debt relief technique that entails paying off your bills in ascending order of size. Start by paying the minimal amount owed on all except the lowest of your bills. Spend as much money as you can on clearing the smallest debt until it is fully paid off. Then transfer the funds you were using to pay down that obligation to the subsequent smallest loan. Continue doing this until all of your debts are paid off.
The debt snowball strategy works well because it offers you a sense of accomplishment as you pay off each bill and helps you build momentum.
4. Consider a balance transfer or debt consolidation loan
If you have credit card debt, switching your balance to a card with a lower interest rate might help you lower your interest rate and therefore, save on interest payments. Additionally, many credit card issuers offer promotional balance transfers with low or free interest rates for a predetermined amount of time. This can help you pay off your debt more quickly and save you money on interest fees. Be careful since these promotional rates only last for fixed period of time and it’s important that you pay this down during this time even if it’s temporarily buying you some time; otherwise, once the promotional period is over, the interest rates could skyrocket. It’s important that if you are pursuing this strategy, please read the terms and conditions of the cards and do your own benchmarking. Examples of recent credit cards that offer 0% APR for purchases and balance transfers can be found here. As of March 2023, Nerd Wallet’s pick for the card with the lowest rates for the longest time appears to be Bank Americard.
Alternatively, another strategy that has been used is consolidating your debt with a debt consolidation loan that may be offered by banks, credit unions and other lenders to convert many of your debts into one loan payment, simplifying the number of payments to make and offering a lower interest rate to reduce your monthly payments. However, beware that although your monthly payment might be lower, it may be because you’re paying over a longer time period which means that you could be paying a lot more overall—including fees or costs for the loan. Additionally, be careful of any “teaser” rates that only last for a certain amount of time.
5. Increase your income
Often times, simply cutting expenses does not produce enough savings to pay down your debt. In parallel, consider increasing your income by taking on part-time gigs or a side hustle to earn more income to swiftly lower your debt. There are several ways that you may be able to make extra side income some of which include:
- Selling used items on Amazon or eBay
- Creating digital products on Amazon KDP, Gumroad or Etsy
- Becoming an affiliate marketer (e.g., Amazon Affiliates, Clickbank)
- Becoming a virtual assistant or freelance writer
- Providing online tutoring services (e.g., Teaching English on VIPKid.com)
- Selling courses online (e.g., Udemy)
- Participating in Online Surveys (e.g., Survey Junkie) and User Focus Groups
Please note that this is not an exhaustive list and there are many other ways to make money depending on your skillset and your interests. By increasing your revenue, you’ll be able to pay down your debt more rapidly and get closer to your objective.
6. Negotiate with your creditors
If you’re having trouble making your payments, think about negotiating with your creditors to see if they can provide you a more manageable payment schedule or a reduced interest rate. First, review the terms of your credit card and research the current interest rates offered by other companies. Next, call the customer service department and explain that you are considering other cards with lower interest rates and ask the representative to lower your interest rate or offer a promotional rate. Finally, ask for a written agreement outlining the new terms and conditions of the card. Many creditors are eager to cooperate with you in order to come up with a solution that benefits both of you.
In summary, debt reduction requires a combination of tactics, including budgeting, debt prioritization, the avalanche or debt snowball method, taking into account a balance transfer / debt consolidation loan, raising your income or negotiating with creditors for lower rates. You may swiftly pay off your debt and lessen some of the stress and anxiety that comes with being in debt by implementing these tactics.
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