How to Pay Off Debt Faster
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
If you’re committed to end your debt cycle, there are several tried-and-true methods to help you achieve your goal.
These options include the snowball method, the avalanche method, the snowflake method and debt consolidation. To help you decide which approach is best for your mindset and budget, here’s an overview of the different methods you can use to pay off your debts faster.
While each approach has upsides and downsides, having a choice of how you want to start tackling your debt is helpful. With a clear plan in place, including an honest assessment of the total amount of debt and a timeline to pay it off, the light at the end of the debt tunnel may not be too far away.
Several factors may contribute to the option you choose, including the amount of debt you owe, the patience you have and the time you are willing to invest to tackle the problem.
Debt snowball method
Before you begin your debt payoff strategy, it helps to document all your debts, their applicable interest rates and minimum payments on a spreadsheet or sheet of paper.
You’ll also need to determine a specific amount of cash you can apply toward your debt each month after making a rough budget of money coming in and money going out.
The goal is to apply any extra cash above and beyond your monthly bills toward your debts. If you’re coming up short, then you may need to jump to the snowflake method or consider a debt consolidation loan, which we cover in more detail below.
The debt snowball method is great for those who prefer to hit small milestones to keep them motivated. It involves making larger payments toward the debt with the smallest balance first to get the momentum going, then once that debt is paid off, moving onto the next smallest debt. In the meantime, larger debts will only be paid the minimum amount due until they are next in line.
This method can provide momentum and “snowball” into helping you tackle larger debts.
Priya Malani, founding partner of Stash Wealth, a financial planning company, said that, psychologically, the debt snowball method is the most satisfying approach to becoming debt-free.
“At the end of the day, personal finance is not just about numbers, it’s also about what is motivational,” she said. “This strategy brings you many wins along the way and so you are more likely to stick to it, and that’s key.”
Financially, it makes more sense to pay off debts with the highest interest rates first, as the quicker you pay those off, you’ll end up saving more money on interest charges. However, sometimes emotion overrides logic, and if it’s motivation you’re seeking, then give the debt snowball method a whirl.
Debt avalanche method
The debt avalanche method is best for those who are anxious to knock out debts with high interest rates first. It involves allocating the largest payment possible on the most expensive debt first, while continuing to make the minimum payments on all other debts. Then, once that debt is paid off, you’ll move on the next highest APR debt.
This is where that spreadsheet comes in handy, and you can rank your list of debts from those with the highest APR to lowest APR.
By starting to pay off debts with the highest interest rates, you’ll end up saving money in the long term. “From a mathematical standpoint, it’s the smartest method because you are paying the least in interest over the life of your loans by paying off the debt with the highest interest rate first,” Malani said.
If your debt with the highest interest rate also happens to have the largest balance, it will require true dedication as it may take a while to pay off your first debt.
Debt snowflake method
The debt snowflake strategy is best for those who don’t have a chunk of change left over every month to apply toward debt repayment. As the name suggests, this method entails taking smaller steps toward repaying your debt by saving money in small ways and applying those funds toward your debt load as they become available.
For example, you can start up a side hustle and commit to only using that income for debt repayment. The same goes if you get a bonus, raise or any other kind of financial windfall. Depending on how committed you are to finding additional sources of income will impact how quickly you can eliminate your debt.
Small changes are easy to make and can translate into huge gains. For example, skipping the morning Starbucks run, canceling some subscriptions, decluttering your life and selling the extra stuff or bringing a homemade lunch to work can all add up and make a dent in your debt.
According to Malani, this is not really a method but more of a financial wellness bonus, and it works better in conjunction with another approach. If you are looking for a standalone strategy, this may not be the quickest approach to get out of debt unless you do get a steady side hustle or find ways to free up money every month.
Debt consolidation using a personal loan
Debt consolidation using a personal loan can be a lifesaver for consumers who would prefer one set repayment amount each month with a set end date in sight. A loan can allow you to pay off much or all your debts in one swoop, ideally at a lower interest rate, leaving you with a single loan payment over a specific amount of time, such as two to seven years. Banks and credit unions offer these types of loans.
Debt consolidation takes the guesswork out of how much to pay every month and can collapse multiple debt repayments into one. Plus, you will know exactly when you will be debt-free when the loan repayment period expires.
You may have to pay a loan origination fee, which is often rolled into the loan and can range from 1% to 8%, according to Experian. This fee can be based on your credit score, meaning the better your score, the lower the fee. And your credit score will be considered when the lender determines your loan APR.
Another downside to personal loans is that once your other debts have been paid off with the loan, the temptation to rack up new debt on, say, a credit card that now has a $0 balance, can be hard to resist. Creating an emergency fund can help cover unexpected costs where you won’t have to rely on a credit card.
Other debt payoff options
Another debt payoff option is to take advantage of balance transfers, which most credit card companies offer.
These enable you to consolidate your credit card debt onto a new credit card offering a low or 0% promotional interest rate, usually for a limited time ranging from six months to over a year. This allows 100% of your payments to go toward the debt principal rather than interest charges plus the principal, allowing you to pay off your debt faster. If you don’t pay off the entire balance during the promotional period, any remaining balance will be subject to the ongoing APR on the card.
Many of these cards also charge a balance transfer fee of 3% to 5%, which is added to the transferred balance.
Finally, you also have the option to consult a credit counselor to help you work out ways to manage your debt. Credit counselors have the ability to negotiate with lenders on repayment terms, such as lower interest rates, and you’ll be charged a monthly fee for their services.
However, much like a personal loan, you’ll only have to submit one payment to the credit counseling agency every month. According to the Federal Trade Commission (FTC), most reputable credit counseling organizations are nonprofits and offer services through local offices, online or by phone.
While facing a heavy debt load might be overwhelming, coming up with a strategy for getting out from under it can provide the incentive you need.
Malani also highlighted another benefit of systematically working your way out of debt. You know right away what the ending point — the last day of payment — will be. “By knowing the exact day, you see the light at the end of the tunnel,” she said.