How to Get Out of Debt Fast: 9 Tips That Work

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. 

Debt can be challenging, but having debt doesn’t mean there’s no hope for getting free. It could be an opportunity to rethink your finances by revisiting your cash flow, identifying areas to cut spending, and optimizing repayment strategies.

Ready to learn how to become debt free? Focus Federal Credit Union has nine great tips on how to get out of debt fast.  

1. Understand Your Debt

In simple terms, debt is money you owe. Debt can come from purchases on your credit card, like groceries, clothes, or entertainment. It can also come from a medical emergency, tuition, or buying a house. 

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 credit card debt, which can become difficult to manage and challenging to pay off. Debt becomes a burden when you have more debt than your income can support. 

Warning signs that you have too much debt:

  • You only pay your minimum monthly debt payments. 
  • You send payments late and incur penalty fees.
  • You’ve maxed out your credit cards. 
  • You don’t have an emergency fund.
  • Your bank account is at or below $0.

2. 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 tackle 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. Once your smallest bill is paid, you repeat, repaying your debts from smallest to largest. As you pay off balances, you’ll 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 that 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 your 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 in order of interest rate. You’ll 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:

  • $500 payday loan with 400% 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 would focus on the credit card and, then, 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.  

3. Budget and Track Spending

Whatever strategy you choose, you must create a budget and track your progress. A budget will allow you to easily see where each dollar is going, which will help you identify areas where you could cut costs. Start by looking at your current expenses. 

To create a budget: 

  • Determine 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 earnings are the same amount every month. But determining your monthly income is more complex if you’re self-employed or your wages fluctuate. 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.
  • Calculate Your Fixed Expenses. Fixed expenses are those regular expenditures that are the same from month-to-month. 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. As you calculate, please 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 include non-monthly occurrences, including discretionary spending such as entertainment, eating out, shopping, and travel. Budgeting variable costs can be more challenging. Review past credit card bills and bank statements can help you estimate.
  • Compare Expenses to 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 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 as well. Recording your spending can give you ideas on adjusting for future months. Review your spending regularly and revise your budget as needed.  

4. Reduce Expenses

Now that you’ve mapped out your expenses, it’s time to look for opportunities to lower spending. If you can reduce a portion of your bills and tighten your spending, you’ll have more to use toward paying down debt.  

Start with fixed expenses. Certain expenses are easier to trim down than others. Look for opportunities to comparison shop. Nowadays, most cable providers bundle television and internet. It could be time to replace cable with a streaming service or cut back on multiple 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. Lowering larger fixed expenses such as rent is significant but will take longer.

Now, it’s time to tackle variable expenses. The upside in variable expenditures is you have more control of them. Finding opportunities to save is easier but will likely require lifestyle adjustments. Cutting back on entertainment, eating out, and new clothes or other optional purchases are simple ways to reduce expenses. Save on groceries by planning meals, using coupons, or switching to generic. Skip your favorite coffee shop latte and opt for a homebrew. Forgo spring break for a staycation this year. A few adjustments can make a significant impact on your variable expenses. 

Once you find places to cut, put that “extra” money toward paying off debt.

5. Negotiate Better Interest Rates

Debt management can be challenging when battling high interest rates. If high interest rates on your credit cards are eating into your savings, you should know that 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 account longevity and history may provide you leverage, begin by calling the account you’ve had the longest. 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. 

Research to understand the market. Check competitor credit cards to evaluate the deals they offer. You can leverage this information when negotiating, even if you choose not to switch companies.

6. Earn Extra Income

Start with your current job. Can you pick up extra hours? Can you increase your pay? It may be time to approach your manager about a raise. 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. You might find that you have the skills or the time to provide service others are willing to pay for. Becoming a driver, babysitter, freelance writer, or pet sitter can bring in extra income while offering flexibility.  

7. Debt Consolidation and Balance Transfers

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

Two options to consider for debt consolidation:

  • Personal Loan. Personal loans are lump-sum loans repaid in fixed monthly installments. A Fresh Start Loan can help lower your debt in multiple ways. If you lock in a lower rate, you can save hundreds in interest. Plus, a personal loan gives you a clear end date for when your debt is paid off.
  • Balance Transfer. 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.

8. Pay More Than the Minimum

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.

Plus, paying more than the minimum will lower your credit utilization ratio, an influential factor in determining your credit score. Maintaining a low credit utilization ratio demonstrates your creditworthiness to lenders and builds a positive credit history.  

9. Seek Professional Help

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 you must be in dire straits to benefit, which is not true. Credit counseling is a good resource for anyone needing assistance with their credit and financial plans. Understanding budgeting, saving, and investing enables you to make informed financial decisions. 

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 FFCU

Paying off debt is a significant step toward your long-term financial health. You can gain control of debt. Start a budget, use a debt repayment strategy, consolidate your debts, and utilize any of the previous suggestions. If you need additional support in any of these areas, Focus Federal Credit Union can help you create an individualized plan for how to get out of debt fast. Contact us to learn more.