- There are several ways to pay off debt more quickly, such as paying more than you need to each month and creating a budget to free up more money for debt repayment.
- Different debt repayment strategies can help you decide which debts to tackle first.
- Other strategies, like setting up automatic payments or refinancing your debt, may help you achieve your goals.
Most people have some form of debt, such as student loans, car debts, a mortgage or credit card debt. While taking on debt can help you reach your financial goals — such as purchasing a vehicle or owning a home — it’s important to learn debt management so you can pay back the money you owe in a timely manner.
Being strategic with your money can help you pay off your debts more quickly, potentially saving you money on interest in the long run. However, it’s important to find a plan that suits your goals and budget. The following five considerations may help you create a debt repayment strategy.
1. Pay more than you need to
Those seeking to pay off debt should consider making more than the minimum monthly payments. Paying the minimum balance generally pays off debt relatively slowly. Depending on the interest rate on your account and the amount you owe, a significant portion of your payment may go toward paying off interest instead of paying down the balance.
Paying more than you need to, either by making more than the minimum payment or making multiple payments in the same month, helps you pay down debt. However, it’s important to understand the terms of your loan, since some lenders may charge added fees or penalties for making extra payments. Review your loan agreement or reach out to your lender to learn whether you can make extra payments without fees.
2. Set up automatic bill payments
Setting up automatic payments (autopay) for your monthly bills helps automate debt repayment so you can more easily pay off the money you owe. Autopay helps ensure payments are submitted on time, helping to combat fees for late or missed payments. Additionally, some lenders offer interest-rate discounts for setting up autopay.
Consider setting up other reminders to ensure bills are paid on time. Using text or email reminders and checking paperless bill statements online can help you stay on top of your expenses as you pay off debt.
3. Utilize specific loan repayment strategies
Those juggling multiple accounts — for example, more than one credit card — need to strategize about the best way to pay off debt. These strategies could include:
- Debt avalanche method: Pay off high-interest debt first and then target the next highest-interest debt.
- Debt snowball method: Pay off the smallest balance first and then allocate money toward the next smallest balance.
The debt avalanche and debt snowball methods each have their advantages, so it’s important to understand both to identify the one that appeals to you.
Debt avalanche method
The debt avalanche method prioritizes loans with high-interest rates. These are also referred to as the “most expensive” loans since their high rates generally mean you’ll pay the most interest.
Paying off high-interest loans can help you pay less in the long run by minimizing interest. Once the highest-interest debt is paid off, you would then tackle the loan with the next-highest interest rate.
Debt snowball method
The debt snowball method prioritizes paying loans with the smallest balance first. Once the first balance is paid off, you would then target the next-smallest debt and continue until all your debt is paid off.
Because the debt snowball method tackles the smallest debt first, borrowers pay off the first debt relatively quickly. This creates a “snowball” effect that reduces the number of debts you must repay, which may help debt repayment feel more manageable.
4. Consider refinancing debt
As you create a debt repayment strategy, consider the type of debt you hold — for example, student loans, car loans, personal loans and credit cards — and evaluate the potential benefits of refinancing it at a lower interest rate.
Refinancing involves consolidating your various debts into one single debt for the purpose of debt payoff. If you're able to refinance your debt at a lower rate than you’re currently paying, you will likely pay less interest overall.
However, each case is unique, and refinancing may have potential drawbacks. Consulting a financial expert can help you determine if refinancing may be a savvy option for you.
5. Budget and save
It may seem simple, but making a budget can make a big difference when it comes to managing your money and paying off debt. Proper budgeting helps ensure you’re allocating your money mindfully and can identify expenses you may be able to cut to repay your debts.
What’s more, following a budget helps you plan how to cover your monthly expenses without accumulating more debt. It also serves as an opportunity to create savings goals, such as building your emergency fund, that may help you prevent unexpected debt in the future.
Final thoughts on paying off debt
No matter what your ideal financial future is, a smart debt repayment strategy can help you get there. Paying off debt not only frees up money in your budget but also helps improve your credit score, which may expand the financial opportunities available to you in the future.&
It also helps create peace of mind. With no lingering debt, you can enjoy the feeling of freedom that comes with a debt-free lifestyle — and direct your energy into reaching your other financial goals, like saving for retirement and building your emergency fund.