How to pay off debt faster: Tips and strategies
Updated December 29, 2023 | Published September 13, 2023
The impact inflation has had on everyday necessities, such as rent and groceries, has caused consumers to add debt to credit cards in order to make ends meet. At the end of 2022, the total credit card debt of Americans had risen to a record $930.6 billion, with the average balance per person equaling $5,805. This puts credit card debt in America at an all time high. Many millennials and Gen Zers aren’t just struggling to pay off high-interest credit card debt, they are saddled with student loan debt as well, making it difficult to save for other goals. According to a Redfin survey in September 2023, nearly half of millennials and one-third of Gen Zers say their lack of ability to save for a down payment is a major barrier to them buying a home.
Our mission at Webster First is to empower our members to make the right financial decisions. We’re going to tell you about three common debt payoff strategies, and provide some additional tips to help you budget and save.
Debt payoff strategies
1. Debt snowball strategy
This strategy starts with paying off debt on accounts that have the lowest balance first. Pay as much money as you can manage putting towards those at one time. Meanwhile, you make only the minimum payment on accounts with higher balances. Once the small debts are gone, you add what you would have been paying on those bills to your payments on the larger accounts. For example: You paid $200 a month to your small debts while paying the minimum balance of $25 per month on others. When the lowest balance is paid off, you begin paying an extra $200 a month towards the next lowest balance.
2. Debt avalanche strategy
With this strategy, you pay off your debts with the highest interest rate first, while making the minimum payments on the rest. Once you pay off the highest rate credit card or loan, you move to the next highest rate account, and so on. A high balance coupled with a high interest rate will have you gaining more debt faster than you can pay it down. Just like with the snowball strategy, you’ll want to pay as much as you can manage on those high interest accounts first.
3. Debt consolidation
Consolidating your debt means taking multiple loans and combining them into one. This way you only have to make one monthly payment at one interest rate instead of several. The consolidation loan will most often have a lower rate than your original loans. Credit cards are one of the most expensive ways to borrow money. You could consolidate debt with a personal loan or a home equity loan. Talk to one of our loan officers to see which choice would be best for you. Also see Home Equity Loans vs. Home Equity Lines of Credit: Which one is right for you?
If you’re wondering exactly how long it will take you to pay off your debt, use our calculators to answer questions like, “Should I refinance?” “How long will it take to pay off my credit card?” “Should I consolidate my loans?” and many more.
Debt management and money saving tips
If you’re one of the 60% of Americans who report living paycheck to paycheck, you may not have the money to put additional principal payments on your loans just yet. Here are some other ways to get more money in your pockets that you could use towards paying down debt.
Open a balance transfer credit card with 0% APR
Many credit card companies offer balance transfer cards that have an intro period of 0% APR (Annual Percentage Rate) for the first year. Some now even offer this for the first two years. This means your high-interest credit card balance will be transferred to a new card which will gain no interest for that period. Making it easier and quicker to pay your balance off. Keep in mind that opening a new card and closing out another will affect your credit score.
Refinance other loans
While a mortgage or car loan may not have quite as high of an interest rate as credit cards, it is always worth looking into obtaining an even lower rate. Lowering your rate while extending your payment period can help you have lower monthly payments on loans like these. This will free up extra money to put towards principal on your higher interest loans. Once those are gone, you can work on making extra payments to your refinanced loans to pay those off too.
Review your existing bills
Aside from loan payments, you’re probably paying for things like electricity, internet, trash pickup, phone plans, car insurance, subscriptions, etc. Shop around and get quotes for these services from other companies. Switching could get you a cheaper bill, and that extra money you save can be paid toward your debts. Also see Tips to Save Money on Your Winter Energy Bills.
Review your subscriptions for things like streaming services and eliminate the ones you don’t need. For the ones you do feel you need, consider paying yearly rather than monthly if the option is available. In many cases this will be a better value.
When reviewing your existing insurances, consider using our agents at WebFirst Insurance, LLC. They work with a variety of carriers to find you auto, recreational vehicle, homeowners, rental, life, and business insurance at the best price.
Create a budget
Do you know how much your spending each month? Have you taken the time to record how much your household is spending on groceries, gas, and the other items listed above? How much are you spending on nonessential items?
Listing and categorizing your transactions can help you see where your money is going and determine which areas you can cut back on. Our Money Management tool in online banking gives a visual, color-coded representation of your spending habits. And our “Debts” tool tracks your progress to being debt free. You’ll want to take the extra money from areas you cut back on and apply it to your debts until they’re paid off.
With the Money Management tool, you can easily mark tax deductible transactions to make filing easier at the end of the year. Claiming all your deductions may earn a better return for you.
Click here for a step-by-step guide on how to use Money Management.
Use your tax refund
Once you get that tax refund, we know it can be difficult not to blow it all on something fun. When you’re saddled with high interest debt, those desires need to take a back seat. Paying off your debts should be top priority. Imagine how many vacations, concert tickets, or boats you can buy once those debt payments are completely gone!
Updated November 6, 2023