7 Tips for How to Get Out of Debt Quickly

Debt can be used to your advantage, but more often, it holds you back from reaching your goals. You’ve heard the advice: cut up your credit cards, stop eating out, give DIY gifts. Those tips may work for some, but to really make a dent in your debt, you need to do more. 

Tackling your debt involves rethinking your finances, revisiting your cash flow, identifying areas to cut spending, and optimizing repayment strategies.

Ready to learn how to get out of debt quickly? The Focus Federal Credit Union has seven tips to help.   

1. Understand Your Debt

Understanding your debt is the first step in how to get out of debt fast. In simple terms, debt is money you owe. The most common forms of debt are mortgages, auto loans, personal loans, and credit cards.

Certain debt is necessary to help you achieve life’s milestones. It can help you build on your current and future financial situation. For example, student loans can help your income prospects by giving you the skills necessary for a higher-paying job. Mortgages are another example of “good debt” because property values typically increase over time, building equity you can use in the future.

Bad debt habits, on the other hand, put a strain on your cash flow and drain your wallet. Overspending on things like clothing, food, and entertainment can build debt, which can become complex to manage and challenging to pay off. Debt becomes a burden when you have more than your income can support. 

Debt is typically accumulated through loans and revolving credit. With a loan, you receive a set amount of money, which you must repay in full by a specific date, which may be months or years. The loan terms will also stipulate the interest you will pay the lender. 

Credit cards provide revolving or open-end credit with no fixed end date. You are assigned a limit when you open a credit card or line of credit, which can be used repeatedly if they don’t exceed the limit.

You may have too much debt if you:

• Only pay your minimum monthly debt payments 
• Send payments late and incur penalty fees
• Max out your credit cards 
• Don’t have an emergency fund
• Have $0 or below in your bank account 

2. Consider Options

If you’re juggling a lot of different debts, debt consolidation and other options could help you save on interest and streamline repayment by combining credit card and loan balances into one lower-interest loan. 

Options to consider:

• Debt Consolidation. Consolidation rolls multiple debts into a single payment. Consolidating your debt can be wise if you have multiple higher-interest debts, and you can get a lower interest rate than you’re paying. You can consolidate your debt through a personal or lump-sum loan repaid in fixed monthly installments. A Fresh Start Loan can help lower your debt in multiple ways. If you lock in at a lower rate, you can save hundreds of dollars in interest. Plus, a personal loan gives you a precise end date for when your debt is paid off.
• Negotiate Your Credit Card Interest Rate. Debt management can be challenging when battling high interest rates. If high interest rates on your credit cards are eating into your savings, know the rate isn’t set in stone. Most credit cards have a variable interest rate, which can fluctuate based on factors, including at your card issuer’s discretion. Negotiate a lower interest rate by calling your issuer. Since longevity and history may provide you leverage, begin by calling the longest account you’ve had. You’re most likely to find success if you have an on-time payment history and your credit score is strong. Even if your credit could be better, you may still have success if your score or income has recently increased. Before calling, check the competitor’s credit cards to evaluate their deals. You can leverage this information when negotiating, even if you choose not to switch companies.
• Refinance Your Loan. If you have a mortgage payment or a car loan, interest is a large portion of your monthly payment. Refinancing could help lower your interest payments over time if money is tight.
• Transfer Your Balance. A balance transfer moves debt from one account to another. Moving to a credit card with a lower APR can be a big money saver. You may have to pay a transfer fee during this process, and these cards are reserved for borrowers with good credit history, but if you qualify, it could be worth it.
• Consider a Debt Settlement. With a debt settlement, you and the creditor agree to settle the debt for less than you owe. It might be a good option if you have a long history of struggling to pay down your debts, more than 120 days have passed due, or you have been submitted to collections agencies. A debt settlement won’t eliminate your entire debt, but it can help provide some financial relief.  

3. Decide on a Debt Repayment Strategy

While making the minimum monthly payments on loans and credit cards will keep your payment history in good shape, you will stay in debt longer and pay more interest. Two popular methods to repay debt are the snowball and avalanche methods. Both approaches have you tackling one debt at a time.   

The Debt Snowball Method 

The debt snowball method prioritizes paying off your smallest debts first. You pay the minimum on all bills and allocate extra cash to the smallest balance until paid in full. When your smallest bill is paid, you move on to the next one. As you pay off balances, you free up more funds to redirect toward other bills.

Let’s look at an example. Assume you have the following debts:

• $8,000 personal loan with 15% APR
• $1,200 balance on a credit card with 22% APR 
• $3,000 balance on a credit card with 19% APR 

With the snowball method, you pay the minimum monthly owed on all three accounts. Any extra money is prioritized to pay off the $1,200 credit card. Once the balance is paid, you channel all your efforts to paying off the $3,000 credit card balance. Finally, you tackle the personal loan.

The debt snowball method is effective, although it may not be the fastest way to pay down debt. But seeing progress is encouraging, and watching your debts vanish can motivate you to stay on track. 

The Debt Avalanche Method

Using the debt avalanche method, you pay off debts according to the interest rate. You pay the minimum on every debt except the highest-rate debt. Once you pay off your highest-rate debt, you’ll focus on the debt with the next-highest rate. 

Let’s say you have the following debt:

• $500 payday loan with 40% APR
• $3,500 balance on a 20% APR credit card 
• $7,000 personal loan with 18% APR

Using the avalanche method, you first pay off the payday loan with the high APR. Then, you focus on the credit card and, last, the personal loan. With the avalanche method, it might take longer to achieve your first win, but in the long run, you’ll pay off the debt faster and save more in interest.   

4. Create a Budget

Every budget begins with documenting your monthly expenses and income. A budget allows you to see where each dollar is going and gives you a clearer idea of how your money is coming in and going out.

To create a budget: 

• Calculate Your Income. Income is any money you get during the month from paychecks or extra money coming your way through jobs, like a side gig or freelance work. Focus on your take-home pay because it’s the amount that winds up in your bank account. Finding the total is straightforward if your monthly earnings are the same amount. But, determining your monthly income is more complex if you’re self-employed, your wages fluctuate, or you have to budget an irregular income in some other way. A starting point is averaging your monthly income for three to six months. You’ll want to monitor and adjust it as the year progresses.
• Identify Your Fixed Expenses. Fixed expenses are expenditures which are the same from month to month. These are big-ticket items with payments etched in stone. Common fixed expenses are rent or mortgage, insurance premiums, cell phone service, internet service, property taxes, utility bills, childcare expenses, student loan repayments, and car payments. While inventorying your fixed expenses, note applicable interest rates, minimum monthly payments, and due dates.
• Estimate Your Variable Expenses. Variable expenses may recur month to month, but the amount you pay in any given month differs. These expenses also include non-monthly occurrences, including discretionary spending such as entertainment, eating out, gas, shopping, and travel. Budgeting variable costs can be more challenging. Reviewing past credit card bills and bank statements can help you estimate.
• Compare Your Expenses to Your Income. Review the amount of debt you owe compared to the amount of income you earn. This debt-to-income ratio can help you understand how much of your money funds your overall debt. To calculate your debt-to-income ratio, divide your monthly debt payments by your monthly income. Then, multiply the resulting decimal by 100 to turn it into a percentage. You want to aim for a debt-to-income ratio below 35%. A higher percentage means you have too much debt.
• Track Your Spending. Tracking your income and setting goals is helpful, but it won’t help much if you don’t keep track of your spending. Recording your spending can give you ideas on adjusting for future months. Review your spending regularly and revise your budget as needed.  

5. Reduce Your Expenses

Now that you have a handle on your fixed and variable expenses, you can look for ways to reduce them. Although fixed expenses are unavoidable, look for ways to reduce them. It could be time to look into bundling your cable and internet or cut back on your streaming services.

Saving money on renter’s, homeowner’s, or car insurance may be as simple as shopping for a better deal with a different insurer. Compare quotes or bundle your insurance for added discounts.

Now, it’s time to tackle the variable expenses. The good news is you have more control over them, so finding opportunities to save is easier but will likely require lifestyle adjustments. And a few adjustments can make a significant impact on your variable expenses. Consider: 

• Cutting Back on Entertainment. Cutting back on entertainment, eating out, new clothes, or other optional purchases are simple ways to reduce expenses.
• Planning Meal. Save on groceries by planning meals, using coupons, or switching to generic. Skip your favorite coffee shop latte and opt for a homebrew.
• Committing to a No-Spend Challenge. For the no-spend challenge, you commit to covering your essentials — food, utilities, shelter, and transportation — while saying “no” to all the extras for one month.

6. Pay Extra, When Possible

While making only the minimum payment on your debt may make your monthly budget more manageable, it could lead to more debt as interest on the unpaid balance grows. Regular payments above the minimum allow you to minimize interest, shorten your borrowing time, and improve your credit.

Earning extra can help you put more toward your debt. Start with your current job. Can you pick up extra hours? Can you increase your pay? If additional hours or more cash aren’t in the cards, it may be time to polish up your resume and look for a more lucrative job or consider a side gig. 

A part-time or freelance job on weekends or evenings can provide an extra boost to your income. Becoming a driver, babysitter, freelance writer, or pet sitter can bring in extra income while offering flexibility.   

7. Seek Credit Counseling

Financial stress can significantly impact your physical health, relationships, and overall well-being. Whether you’re dealing with mounting debt, job loss, or simply trying to build savings, credit counseling may help you take control.

One misconception about credit counseling is that you must be in dire straits to benefit. Credit counseling is a good resource for anyone needing assistance with their credit and financial plans. Just like any professional service, credit counseling grants you access to expert knowledge. A credit counselor will work with you to improve your financial situation. 

Credit counselors provide educational resources and workshops to help you understand credit and develop better spending habits. Improving your financial literacy can help you recognize and avoid predatory lenders, build or rebuild your credit, and create a savings plan.  

Credit counseling is tailored to your unique circumstances. Financial experts can provide individualized coaching to help you evaluate your situation, review your finances, assess your debt management, and develop a plan to pay it off.  

Find Out How to Get Out of Debt Fast with TFFCU

Paying off debt is a significant step toward long-term financial health. You can gain control of debt by starting a budget, using a debt repayment strategy, consolidating your debts, or following any of the previous suggestions. If you need additional support in any of these areas, Focus Federal can help you create an individualized plan to get out of debt quickly. Contact us to learn more.