How to Pay Off Debt – The Definitive Guide to Get Out of Debt

Have you been chipping away at your debt for the last few months or years? Maybe you’re starting to feel discouraged and tired of aimlessly paying off your huge pile of bills and wonder if you’d ever get out of debt.

Well, you are not alone. In this article, I will be showing you how to pay off debt fast, build wealth, and enjoy the financial freedom you deserve.

The truth is aiming to pay off your debt is an excellent decision as it’s your major step to financial freedom.

As you know, debt is like a chain that ties you to reaching your dreams. It’s time to release yourself from its burden and start living the life that you deserve.

So what steps must you take to achieve this?

To some, paying off your debt can be a lot of work, but it doesn’t have to be. With the proper planning, it doesn’t need to be stressful and overwhelming.

When you’re trying to pay off your debt, it is important to know how the different debt payment strategies can affect your financial life.

This is why it is important to focus on the best way to pay off debt. So this is our focus here.

As you continue reading, you will learn all the possible ways you can follow to pay off your debt as soon as possible.

Ready to dive in? Good! Here we go!

Table of Contents

What is Debt?

What is Debt Management

Debt refers to money borrowed by a person or group from another. For example, when you make transactions on credit or take out loans, you are in debt.

The total amount you owe is the total amount of your debt. The total amount you owe is usually required to be repaid later or in installments over time.

For most debt, interest is typically required every month as a percentage of the total loan.

Debt technically isn’t a bad thing. For instance, if you borrow money to go to college and get a degree that increases your earning potential and helps you secure a higher-paying job down the road, it was worth it.

Debt only becomes a problem when you are unable to pay it off. Unfortunately, you may feel like you’re in debt forever as you continue to take out money to pay off your debt.

What Are The Common Types of Debt?

What Are The Common Types of Debt

1. Secured Debt

Secured debt is any debt that is backed by collateral. To verify a borrower’s creditworthiness, a credit check could be performed by the lender.

But in the absence of payment, the asset is assigned to the lender. To ensure the loan is repaid, the lender has the option to take possession of the asset.

A typical example of a secured debt is a car loan. A lender funds the acquisition but also holds a security interest on the car’s title.

If the borrower doesn’t pay, the lender can legally seize the vehicle and sell it to get the money.

This type of loan will have a lower interest rate because it is based on the borrower’s creditworthiness and collateral.

2. Unsecured Debt

Unlike secured debt, unsecured debt doesn’t require collateral for loan eligibility. In this case, lenders give money only if they believe the borrower will pay them back.

The borrower is legally obligated to pay back the money and face the consequences if they fail.

Because this is a more costly offer, most unsecured come with higher interest as compensation to the lender’s risk.

Examples of unsecured debt include signature loans, credit card loans, medical bills etc.

3. Revolving Debt

Revolving debt is a type of debt whereby the borrower borrows up to a maximum amount regularly. A typical example of this is a line of credit or credit card debt.

A credit card offers a line of credit and allows the user to spend as much as they want until they reach the credit limit.

The amount of money you can borrow to resolve debt depends on the amount of money you’re currently owing.

As in the case of a credit card, resolving debt can be unsecured or secured, as in a home equity line of credit.

4. Mortgages

Mortgages are the largest debt for many borrowers. These are loans that are designed to fund the purchase of a property.

Mortgage usually has the least interest rate compared to other loan options. In addition, mortgages are tax-deductible for borrowers with itemized taxes.

Generally, mortgages are issued for 15 or 30 years so that borrowers will have enough time to pay them off.

What do You need To Know About Debt?

What you need to know about debt management

1. Know Why You Need The Money

Before obtaining a loan, it is important to know why you are borrowing the money.

There are no two ways about it: borrowing money either helps you become successful or a failure. It all depends on understanding why you need the loan and managing the loan effectively.

One of the significant debts you’ll ever accumulate is a home mortgage. So collecting a loan for a small down payment for a property that doesn’t exceed your means is a good idea.

However, if you will use credit cards or personal loans to buy items, be sure you can pay them off without exceeding the deadline.

Having an emergency fund will help you avoid getting into debt for unexpected expenses like medical bills, car repair, home repair, and urgent trips.

If the reason you need a loan is beyond what your emergency fund can handle, then you can consider taking a loan.

2. Know How Much You Need

When you learn why you need the money, the next thing is to know how much you need and whether you can afford to pay back without exceeding the deadline.

Here you need to be careful. The fact that you pay the monthly minimum of the loan doesn’t mean that you can afford the total amount.

You should critically assess your financial capability to be sure you can cover the total debt as at when due.

3. Know Your Credit Score and History

Now that you know the amount of loan you need and can afford to repay, it is time to know your credit score and credit history.

The type of loan and interest you will be eligible for may determine by your credit score and credit history.

Without a good credit score and credit history, you can’t expect lower interest charges, low payments, and your chances of saving money are greatly diminished.

This is why you need to know your credit score and credit history to know which loan options you have.

Take advantage of free tools like Credit Karma and Credit Sesame to check your credit score and credit history.

Also, you can request a copy of your credit report for free at Experian, TransUnion, and Equifax.

4. Know All Your Loan Options

You should know your loan options as this could save you a lot of money.

Lenders have different ways of providing loans, and each has its benefits. However, if you choose the wrong lender, you could end up spending more in the long run or even paying extra for no reason at all.

Based on your credit score and credit history, there are different loan options out there to choose from.

A pre-existing relationship with your bank may help you avoid delays and disappointment to get a quick personal loan. Also, taking your loan with your bank makes it easier to control the payment.

For a credit card loan, all you need is decent credit, and you’re good to go.

5. Know the Exact Terms and Conditions of the Loan

Understanding all the terms and conditions of your potential loan is important before taking it.

Keep in mind the annual percentage rate (APR) and all the charges could incur over the loan period duration.

Here are some of the top hidden fees of loan you need to be careful with when considering an offer:

  • Prepayment consequences
  • Late payment charges
  • Failed payment charges
  • Loan origination/processing charges

It is also important to understand how loan interest is calculated. When interest is compounded, it adds up to a current interest of an unpaid loan.

Because it is typically computed monthly or daily, ensuring that you clear your debt fast will help you avoid compounded interest.

Some loans have fixed or pre-calculated interest rates. This reflects in your monthly payment.

With a pre-calculated interest rate, regardless of the amount you borrowed or when you pay, you’ll pay the same in interest. In this way, you won’t be able to save as much money.

Ensure that you understand everything you’re signing so you’ll have a complete picture of the situation.

Why Pay Off Your Debt?

1. Pay Less Interest

One of the biggest reasons to pay off your credit card debt is that you will save a lot of money by not paying interest on your credit card balance.

Overdue credit card debt can cause you to pay a large amount of interest on what you owe for many months or years. To avoid this, you need to pay off your credit card debt as soon as possible.

By paying off your credit card debt, you will reduce the impact that your future spending decisions will have on your cash flow.

With an average rate of 19%annual percentage rate, you will save thousands of dollars by paying off your card credit debt when due.

2. Reduce Stress

Credit card debt causes a lot of stress for many people. You wake up in the morning wondering how you are going to make your minimum payments.

This level of stress can affect all areas of your life, including professional, personal and family. Paying off your credit cards allows you to get rid of the worry.

Being credit card debt-free means that you don’t have to worry about paying interest rates or getting calls from collection agencies.

This will reduce any stress from financial challenges and give you more freedom to take profitable actions.

3. Have Financial Security

Financial security is one of the most important goals you should set. But, to achieve it, you need to eliminate your credit card debt.

Indebtedness can really hold you back from reaching your goals and living the life you want.

Paying off your credit card debt will have many benefits in your life. It can help you get your finances in order, buy a home, and increase the likelihood that you’ll retire wealthy.

Your current financial situation will determine your financial security in the future. Therefore, it’s essential to understand how paying off your credit card debt contributes to this.

4. Increase Your Future Earnings

When it comes to increasing your future earnings, the single best thing you can do is to pay off your credit card debt.

When you allow debt to pile up on credit cards, you ultimately take money away from yourself in the future.

If you pay off your credit card debt now, you will have more money, later on increasing your future earnings.

The amount of debt you are in is like a chain around your neck, restricting everything you do. Every decision you make is affected by how much you owe, which may determine your future earnings.

5. Contribute to Your Retirement Plan

How do you save for retirement? Do you contribute to 401k, your employer’s retirement plan, or other tax-advantaged savings accounts?

If so, you should consider paying off your credit card debt too. You have plans for your retirement, and you want to enjoy the time when you stop working.

To do that, you have some saving and investment to do — along with some paying off your credit card debt.

If you have outstanding credit card debt, paying it off as soon as possible is one of the top investment moves that can help give your retirement portfolio a boost.

6. Qualify for Mortgage or Car Loans

When you get approved for that mortgage loan or car loan with no money down, it’s a great feeling. But what happens if you can’t make those payments? It’s the worst.

Basically, when you have a significant amount of credit card debt, your credit score is lower. Having a low credit score makes it more challenging to qualify for loans like a mortgage or car loan.

This is because any money you owe on your credit card will be reflected on your credit report and negatively impact your credit score and, subsequently, your ability to borrow.

Paying off your credit card debt can help improve your overall financial health and can also make it easier to qualify for mortgage and car loans in the future.

Consequences of Not Paying off Your Debt

What are the Consequences of Not Paying off Your Debt

1. Lawsuits

A lawsuit is one of the worst consequences of not paying off your debt initiated by debt collectors to recover the full amount of a consumer’s debt.

Debt collectors can’t force you to pay off your debt without going to court. However, if they take you to court, the court could garnish your income and bank account.

Even if you think your debt has exceeded the statute of limitations, don’t shun a lawsuit summons.

If you’re being sued, speak to an attorney about the right course of action.

In addition, each state has its own set of debt collection rules. This is why you must seek sound legal advice if a debt collector approaches you.

2. Reduced Credit Score

Not paying your debt could hurt your credit score. Most financial institutions evaluate your credit score when deciding whether or not to lend you money.

Once an account is a past due, it will appear on your credit report even if you pay your bills after they’ve become delinquent.

The late payment will remain on your report for seven years from the date the account became delinquent. This may reduce your credit score.

A lower score means that financiers may choose not to give you a loan at all or charge you a higher interest rate on any loans they do make to you.

Your credit score can also affect your ability to access some kinds of insurance, such as car insurance.

In addition, some employers check credit history as part of the application process for jobs and employee discounts.

3. Unfavourable Interest Rates

When you have unpaid debt, one way a creditor can legally charge you money is by charging you interest on top of your original balance.

Interest is the extra money that creditors make on top of the value of your original loan.

These unfavourable interest rates could total thousands of dollars in extra charges, and they will continue to rise if you don’t pay off your debt sooner rather than later.

If it gets that bad, you may find it difficult to borrowing more money or building your savings.

You may be paying them for a long time. But, at the end of the day, you’ll have less money to spend on what’s really important to you.

4. Frustration

A major consequence of not paying down debt is the frustration of striving to stay on top of your debt that just grows and grows.

You’re frustrated by the constant phone calls and the threats from creditors for late payments.

You’re even more frustrated by the fact you need to take action, but you don’t know what to do.

Debt is a difficult burden to handle. It can keep you from getting credit, renting an apartment, and buying a car. It might even keep you up at night.

Not only will you spend most of your waking hours stressing about your finances, but being in debt can also drain your confidence and make you feel insecure about life in general.

How to Pay off Debt – 16 Easy Ways to Pay Off Debt Fast

How to pay off debt fast

There is no one-size-fits-all way of paying off debts. This is because individual situations vary. As such, what works for one person may not work for another.

Consequently, there are many best ways to pay off debt fast, accommodating different circumstances and individual needs.

Depending on your circumstances, you may find one or more of the following ways as the best way to pay off your debt fast:

1. Assess the Amount of Debt You Owe

To pay off your debt successfully, you must know precisely much debt you are owing. This will help you understand how fast and how much your debt is going to cost you.

All you need to assess your debt is to list all your debts and the total amount owed, plus the interest rates and deadlines.

Make a list of all of your debts from smallest to largest. Then, focus on paying down the debts with the highest interest rates first.

Your list should include the creditor, the total amount owed, the monthly payment, the interest rate, and the due date.

Your credit report will help you see all debts on your list. Check it at www.annualcreditreport.com for free.

By identifying all of your debts, you’ll be able to see the big picture and stay on top of your whole debt situation.

However, you need to create a list and check it regularly, particularly when you pay bills. If the total amount of your debt changes, update your list accordingly.

2. Figure Out Your Budget

With debts piling up and a looming increase in interest rates, it might seem like your debt will never go away.

But if you focus on the right actions, the most challenging part of paying off your debt can become much easier.

It’s a good idea to have a plan for how you’ll pay off each of your listed debts – whether it’s with the extra money you put into your savings account or from your monthly income or both.

The goal is to pay more than the required monthly payment for each of your debts so that you speed up your payoff deadline.

While budgeting on your debt payment, it is also vital to create a budget for an emergency fund that you can rely on in any unexpected expenses. This will also help you avoid getting into debt in the future.

3. Reduce Your Spending

Do you want to pay off debt faster without a complete overhaul of your budget? Maybe you already have a budget but want to get out of debt more quickly. You need to reduce your spending.

This means looking at your budget, cutting out unnecessary expenses that you can do without.

Reducing your spending means there is money available to pay off your debt. However, this doesn’t mean that your lifestyle will change by changing your spending habits.

By living with less, you’ll feel more comfortable about your spending as well as freeing up more cash to pay off the debt.

4. Get Extra Means of Income

To pay off debt fast, you will need to think outside the box and come up with multiple income streams.

With a bit of extra money going into each account, interest rates and overall balances will go down—and be paid off quicker.

Having an extra income can also help you in the future if you lose your main source of income or when you retire and no longer have access to a pension or retirement fund.

There are different means of earning legitimate extra income. Therefore, it’s essential to look for a site hustle that fits your skills and passion.

5. Find a Payoff Method

Debt repayment is both a financial and a psychological commitment. You must have the funds to pay off your debts, and you must also find a payment plan that works for you.

There are different payoff methods, but the major is debt snowfall and debt avalanche method.

The debt snowball strategy might be perfect for you if you need quick minor wins to remain motivated in the long run.

You use this technique to put all of your spare cash into paying off your smallest debt first while paying the minimum amount of your big debts.

When it’s paid off, you should channel the funds going to your smallest debt to your next-largest debt accordingly until you pay off all your debts.

On the other hand, the debt avalanche method might be perfect for you if you prefer delayed gratification or you’re saving a little money.

Here you concentrate on paying off the debt with the highest interest rate instead of the smallest amount.

Often concentrating on paying off the debt with the highest interest rate will help you save money in the long run while also speeding your debt-free deadline.

6. Consider Debt Consolidation

Debt consolidation is when you simplify your financial life by unifying your debts into one loan.

Consolidating your multiple debts into a single payment will make the debt simple and cost-effective in the long run.

By consolidating all your debts into one payment, you are likely to cut the interest. The less interest you have to pay, the more money you have to channel into paying off your debt.

To qualify for a debt consolidation loan, you’ll most likely need a decent credit score. Furthermore, each lender has its terms and conditions. However, a decent credit score is a major requirement.

Are you worried about how to consolidate your debt? Don’t worry. In the following section, you will learn about consolidating your debt and the various consolidation options available.

How To Consolidate Your Debt?

Recall that debt consolidation is all about consolidating several unpaid debts into a single payment.

With debt consolidation, you will cut your debt interest rate or get full interest relief. In fact, you can as well get debt forgiveness through debt consolidation.

There are four basic debt consolidation programs available in Canada. To these, we now turn.

1. Debt Consolidation Loan

You could use a debt consolidation loan to pay off your multiple debts on a single payment.

Whether you take out a second mortgage on your home or borrow from your bank, a debt consolidation loan may be a good idea.

  • You must meet the following requirements to be eligible for a debt consolidation loan:
  • It is important to have a budget so the bank can decide whether you will keep up with your loan payments.
  •  You must have a reliable source of income to be able to pay back the loan.
  • You may need collateral or a cosigner.
  • You must pay the required interest and full payment at the required time.

2. Debt Management Program

A debt management program, also known as a debt management plan, helps you unify all your debts into a single monthly payment.

Here your credit counsellor might be able to negotiate a reduction of interest rate or elimination of interest on your debt.

You will work with your counsellor to design a payment plan that will allow you to pay off your debts within a short timeframe.

A debt management program does not include debt forgiveness. This implies that you must repay all your although with little to no interest rate.

It is important to note that not all creditors will consent to this. But if they agree, it is important to commit yourself to pay the full debt else you fail the program.

3. Debt Settlement

Debt settlement refers to the process of paying an amount of money that’s less than the full amount owed.

Debt settlement is usually offered by third-party debt reduction service providers that aim to negotiate with your creditors on your behalf.

This less expensive way to pay off your debt might give you a false impression that you can manage your credit well.

However, debt settlement has the potential of lowering your credit scores or causing you to pay more in the long run.

Even though debt settlement is not a wise approach, it won’t be as damaging as failing to pay off your debt.

4. Consumer Proposal

If settling your debts may not be the most effective option for you, a consumer proposal could be the best option.

A consumer proposal refers to a legal offer by a Licensed Insolvency Trustee (LIT) to your creditor, which seeks the extension of your debt duration or limits the percentage of your payment or both.

When it comes to consolidating your debts, there are many reasons why a consumer proposal may be better than using a single or lower payment. This includes:

  • Eliminates interest
  • Protects your assets
  • Allow for a single and lower payment
  • Handles unsecured debt
  • Debt relief
  • Legal backing against a lawsuit

What Are Debt Consolidation Alternatives?

Balance Transfer Credit Card

A balance transfer credit card is a card made to unify or consolidate your current credit card debt with a low interest rate.

If you use a balance transfer card to transfer balances from one account to another, you receive a lower interest rate.

Often, these credit cards charge zero percent APR for the first year. That’s to say; you will have almost 6 to 18 months of interest-free for paying off the consolidated balance.

You must have a good or excellent credit score to qualify for a balance transfer credit card in most cases.

This debt payment method is suitable for a small amount of debt that is approximately $5,000 or less.

You should aim at paying it off in full before the interest-free period expires. This is because you will be charged high rates after that period elapsed.

Lines of Credit (LOCs)

A personal Line of Credit (LOC) is another alternative to debt consolidation suitable for people with decent credit scores.

Line of Credit is offered by banks or credit unions with a revolving credit limit.  A LOC similar to a credit card because it provides you with an open line of credit ranging to a certain limit.

A LOC requires a monthly payment, usually the same as the accumulated monthly interest rates, resulting in low payments.

The problem with a LOC is that if you just pay off the monthly interest payments, you may end up not paying the balance.

While LOC can help you pay off your credit card debt, you will remain in debt. So this actually doesn’t solve your problem.

Home Equity Borrowing Options

These options allow you to borrow against your house’s equity, which is calculated based on its current value, excluding the remaining mortgage balance.

Borrowing against your home equity will save you money because you can get a lower interest rate even though your credit score is low.

This doesn’t imply that home equity borrowing options are not risky. For example, if you fall behind on your payments, you will face foreclosure.

In general, using home equity to pay off unsecured loans is not a smart idea. However, if you plan to use HELOC funds to pay off credit cards, this may be a good idea.

5 Practical Tips on Managing Your Debt

1. Use An Interest Credit Card Calculator

Interest is the most terrible expense to cover on a debt. This is because debt repayment with interest means you are paying the principal and the interest along with it.

The interest credit card calculator is beneficial in this type of situation. Instead of calculating the amount yourself by hand, you can calculate the amount online just instantly.

An interest credit card calculator such as GreedyRates’ credit card calculator is an essential tool that allows you to quickly determine how much interest you will have to pay on outstanding debt owed.

Using an interest credit card calculator will help you bring changes in credit card usage and know how you can better manage your debt.

2. Pay Your Monthly Bills on Time

Keeping up with your monthly debt payment can be challenging. Sometimes, you may find that you cannot pay your monthly bills for a little while.

This could be due to some financial difficulties, inability to meet up with your daily responsibilities or just an oversight on your part.

It doesn’t really matter the reason behind the delay in paying your bills. The most important thing you should remember is that there is no excuse for missing a payment.

With a bit of discipline and organization, you can handle your monthly payments on time without much stress.

Late payments make it more challenging to pay off your loans because you’ll be charged a late fee on any missed payment.

If you forget to make a payment, don’t wait for the next due date to submit. Instead, pay it as soon as you remember.

Creating a monthly bill payment checklist helps ensure that you remain consistent in paying your monthly bills.

3. Make at Least The Minimum Payment

If you’re struggling to pay off your bill in full – at least pay the minimum required payment so you can avoid the penalties of late or no payment.

There’s no getting around it: if you have debt, you need to make payments on it. So regardless of your means of income, ensure that you make it to the minimum payment.

The minimum payment is an important part of your debt payment since this will keep things from getting even worse.

However, if you can pay above the minimum required payment in a month, please do so. Paying more than the required monthly payment consistently sets you on the path of speedy financial freedom.

4. Know When to Use your Credit Cards

With so many credit card offers out there, it is no secret that using your credit cards can help you build a healthy credit score.

Having a strong credit score will help you when you need to borrow money and help you lower your interest rates.

However, because credit cards can be convenient to borrow, it is not wise to use them at all times.

It might be easier to handle your debt if you can prevent it from rising larger. Stop using your credit cards is one best options.

When you’re paying down debt, don’t add to the balance. This will help you increase your credit utilization.

This is a critical factor that affects your credit score. The lower your credit usage, the higher your credit score would be.

5. Build Up Your Savings

As you are planning your debt payoff strategy, it is important to remember that having money sitting in a savings account is a good thing.

You never want to be without an emergency fund on hand. So instead of spending what you can right away, try making automatic transfers from your paycheck into your savings account.

As a result, you won’t even notice the money going into saving and will build up a nice stash of emergency cash that you can use if ever needed.

This will give you peace of mind knowing that you have a reserve of cash to handle any expenses that come your way that is not part of your usual budget.

Take Away

Debt can be a huge burden, but it’s not the end of the world. However, it is possible to eliminate your debt with time, effort, and dedication.

You’ve just learnt about the best ways to pay off your debt fast and put your finances back on track.

From identifying the amount of debt you owe to consolidating your debt, you’ve different options to manage your debt.

Whatever your situation is, you should know that managing your debt determines your overall financial security.

After all, the more you manage your debt effectively, the closer you are to financial freedom.

Now that you know the best way to pay off debt, which one do you think is suitable for you? Please let us know in the comment section.

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