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Paying off debt can seem overwhelming, especially when the monthly payments start to become too much for your income.
Juggling bills, putting off payments and dodging collectors is all extremely stressful. And financial stress has a way of completely taking over your thoughts, so it’s hard to focus on anything else besides your personal finance troubles. Luckily, you’re in the right place to learn how to pay off debt in the fastest way possible.
Here’s a quick overview of how to become debt free:
There are a few different methods of doing this. First, there’s the debt snowball method. The snowball method is a debt strategy in which you pay off your accounts in order from smallest debt to largest debt. Another method is the debt avalanche method. It encourages you to rank debt by interest rate, not by amount. This isn’t recommended for people on a tight budget, because the debts with the highest APR are often also the highest balances, making it difficult to make a dent in those balances. Additional methods include debt consolidation and debt management programs. For credit card debt lower than $5,000, you can also try a balance transfer.
Here are some tips to help you prioritize:
The solutions you use to achieve the fastest repayment possible are usually not the same solutions you use when you need lower payments.
To start, rate the importance of the following:
Some types of debt, such as student loans, often require separate solutions. So, if you have credit card debt and student loans, you’ll need at least two repayment strategies to solve your problem.
In some cases, you may use more than one solution for the same type of debt. For instance, if you have federal and private student loans, you may want one solution for federal and another for private. If you have one credit card that’s behind but the others are in good standing, you may settle that debt and use consolidation for the others.
Loans like a mortgage or an auto loan won’t be prioritized for repayment, but you might consider refinancing. That can help lower your payments and total costs over the life of these longer-term loans.
If you don’t already have a budget in place, visit Debt.com’s Create a Budget page. If possible, set up savings as a scheduled expense in your budget. Ideally, you want to save about 5-10% of what you take home each month. That way, you can avoid taking on new credit card debt and can focus on repayment.
Savings should be treated as an expense, rather than just using whatever money you have left over at the end of the month. You determine how much you can save, then treat that as a bill you pay yourself.
You can save money and pay off your debt quicker by increasing your income. A side hustle, such as driving for Uber or starting some freelance projects, can give your savings account the boost of extra money it needs.
This means you need to set milestones and avoid taking on new debt until you reach them. There are two ratios that can help you determine if you’re in the right place to take on new debt:
Credit utilization measures how much credit card debt you have relative to your total available credit limit. Anything above 30% is bad for your credit score and generally means that you’ve overcharged and need to cut back. Once your ratio drops below 30%, you can consider making new charges.
Debt-to-income ratio (DTI) measures how much total debt you have relative to your income. You basically divide your total monthly debt payments by your total monthly income. In general, you want to maintain a ratio of 36% or lower. This will allow you to take on new debt without stressing your budget. Lenders check your ratio anytime you apply for a loan; most lenders won’t approve you if the loan puts your ratio over 41%. So, you give yourself a 5% pad, so you can take on new loans and get approved.
You want to make sure:
If you simply want to wait until you finish your pay off plan, you can use free credit report downloads to review your credit once you’re done. If you want to track progress as you go, then you will need a credit monitoring service.
Article last modified on May 2, 2019. Published by Debt.com, LLC . Mobile users may also access the AMP Version: How to Pay Off Debt - AMP.