6 Tips To Paying Off Debt Fast

Debt is a big source of stress for many people, and having debt makes it hard to achieve your financial goals. We’ll share 6 tips to paying off debt fast. 

Debt can cause a lot of stress. It makes it difficult, if not impossible, to achieve financial goals like building an emergency fund, investing for your future, saving for a downpayment, and putting your children through college. 

We’ll explain what “good” debt and “bad” debt is, how to get out of debt quickly even on a low income, and what to do with your money after your debt is paid off. 

Good debt vs. bad debt

In a perfect world, we would be 100% debt-free. That’s not realistic for most of us as it would mean paying cash for things like homes, cars, and college. As such, we can divide debt into “good” debt and “bad” debt. Doing so allows us to prioritize which debts we should pay off first. 

Good debt can include:

• Mortgage

• Auto

• Student loans

• Personal loans (when used to consolidate high-interest debt)

• Business loans

Bad debt can include:

• Credit cards

• Payday loans

• Loanshark loans

Generally, you have something to show for your “good” debt, a home, a car, an education, a lowered monthly debt payment, a business. You may have had a good reason for accumulating “bad” debt; you were using credit cards to pay expenses after a job loss; you had an emergency car repair and had no other way to pay for it. 

So what makes “bad” debt bad is the interest rate. Typically, the interest rates on “good” debts are relatively low, while the rates on “bad” debts are much higher, making them more expensive and harder to pay off. For example, the average interest rate on a payday loan is 391% and can go as high as 600%!

How to pay off debt fast

Paying off debt fast is easier said than done. You can do it, but you must have a plan. There are two good methods for paying off debt quickly.

#1. Prioritize your debts: The bad debts are the ones you should pay off first. The lower interest debts are not as concerning. It can make more sense to next focus on saving an emergency fund and investing for retirement than to worry about those debts. 

#2. Create a plan to pay off debt fast: Two well-known debt payoff methods are the snowball and stacking methods. List all of your priority debts. List them according to dollar amount, smallest to largest for the snowball method. List them according to interest rate, highest to lowest for the stacking method. 

Pay as much as you can each month on the first debt on your list while paying only the minimums due on the others. Once the first debt is paid, you take the money you were paying on it and any extra money you can towards the next debt on the list until it’s paid off. Continue this way until all of your priority debts are paid. 

The stacking method will save you the most money as it’s the interest that makes a debt expensive. But if you have some relatively small dollar amount debts, using the snowball method to knock off a few pretty quickly can be very satisfying and motivate you to keep going. 

How to pay off debt fast with a low income

Having a budget is essential for everyone, but it's especially important when you don’t make much money. 

#3. Create a budget: When you have bad debt, you need to be sending every dollar you can to paying it off. A budget can help you “find” money, money you don’t realize you’re spending, or show that you’re spending more than you realized in a specific category. Track your income and expenses with a budget so you can stop any “spending leaks” and put that money towards your debt. 

#4. Get a personal loan: Having a low income doesn’t necessarily mean you don’t have a healthy credit score. If your credit score is good enough, you may be able to get a personal loan at a lower interest rate than the rate on your debt. You can use the money to pay off the high-interest debt and save a lot of money in the process. 

Paying off even part of your debt can really boost your credit score. If you don’t initially qualify for a personal loan, recheck your rates after paying off some debt. You may qualify or be offered a better rate than you were initially. 

#5. Do a balance transfer: Some credit cards offer balance transfers. You transfer the debt on a higher interest card to the new card. The new card has an introductory period that offers a low or sometimes 0% interest rate. 

The introductory period can be anywhere from a few months to 18 months. During that time, the balance you transferred does not accumulate interest, so all of your payments go towards paying off the principal. If you can pay off the balance before the introductory period, you will have paid no interest. Even if there is still some balance remaining, you will have saved money. 

#6. Use “found” money: Any unexpected money you get, raises, bonuses, gifts, tax refunds, etc., should go towards your debt. This money isn’t part of your budget, so you don’t need it for expenses. 

What to do after your debts are paid off

Don’t get into “bad” debt again! The best way to ensure that is to create an emergency fund. Many people get into debt because something unplanned happens, and they don’t have the cash to pay for it. An emergency fund can go a long way towards ensuring that doesn’t happen again. 

Upwardli is here for you

Upwardli was created to help those newly arrived in the U.S. navigate our financial system. We can help you find the resources and financial partners you need to start your new life on the right financial foot!