When you’re buried in debt, it can sometimes feel like you’re never going to be able to dig your way out of it. But that’s not true — it’s never too late to get out of debt. In fact, it might take you quicker than you realized.
This article will cover some of the most effective strategies for becoming debt-free. Keep in mind that it can still take time to adjust your financial mindset, especially if you have unhealthy attitudes about money.
Focus on Debts with Higher Interest Rates
The first thing you need to do is start paying down your balances fast. In addition to getting you out of debt faster, reducing your balances quickly will also have a positive impact on your credit score.
You should always make more than the minimum payment if you have extra cash, but you might not know which balances to prioritize.
Paying off debts with higher interest rates first helps you avoid as much interest as possible and get out of debt for less money. This is often called the “debt avalanche” strategy.
This can be very effective because credit cards often come with higher interest rates than other forms of debt. You could be paying 20 percent or more of your balance just in annual interest.
With a 20 percent rate, a $1,000 balance would grow to $1,200 over 12 months. Compare that to a 10 percent rate, which would grow that balance to $1,100 over the same time frame. That $100 difference might not seem like all that much, but over the long run, it adds up. In just two years, that balance with 10 percent interest would reach $1,440, compared to just $1,211 at 10 percent.
Higher-rate debt should be your first priority. Paying it off will save you a lot of money.
Remember to make at least the minimum payment on all your debts each month to avoid paying late fees. You should start focusing on individual debts only once you have made the minimum payment toward every balance.
Consolidate Your Debts
Debt consolidation involves combining multiple balances into a single debt. It isn’t the best choice in every situation, but it’s often an effective way to minimize your interest rate.
Consolidating your debts also makes the process much easier since you’ll need to make only one payment each month.
The two most common debt consolidation strategies are debt consolidation loans and balance-transfer credit cards.
Both require a credit check, so your options may be limited depending on your credit history. If you have poor credit, you should think about waiting until your score improves to apply for these loans.
Debt Consolidation Loans
Debt consolidation loans typically offer lower rates than credit cards and other high-interest forms of credit. Even a small reduction in your interest rate can have a significant impact on your total payments, so you should consider applying for a loan if you’re paying a lot of interest.
Secured debt consolidation loans typically offer lower interest rates than unsecured loans, but they also require you to provide collateral. In a home equity loan, for example, you’ll lose equity in your home if you’re unable to make payments. Unsecured loans are usually harder to qualify for.
You should also keep in mind that applying for a debt consolidation loan might have an effect — albeit a temporary one — on your credit score.
While balance-transfer credit cards are worth using only in some situations, they can be the most cost-effective way to get out of debt.
A number of credit card providers offer cards designed specifically for balance transfers, although some cards may be difficult to qualify for if you have a low credit score.
The most important factors to consider when looking for a balance-transfer credit card are the balance transfer fee and the introductory period of 0 percent APR. Most cards charge a fee of 3 percent of the balance, although some cards, such as the Amex EveryDay card, offer no-fee transfers for a month or two after opening a new account.
Here’s how these cards work. Say you have $6,000 in credit card debt. You’d pay a 3 percent fee — $180 — upfront to transfer the balance to a new card. While that might sound like a lot, it’s significantly less than what you could pay in interest.
Balance-transfer cards offer no interest for a certain period of time, giving you the opportunity to pay off the debt without worrying about interest. If your card has 0 percent APR for the first 15 months, for example, you’d need to pay $412 per month to cover the $6,000 balance and 3% fee.
Start an Emergency Fund
Saving money while you’re in debt may sound counterintuitive, but it’s actually the best way to avoid going further into debt. If an emergency occurs — say, you need a medical procedure or a new engine for your car — and you don’t have any money to fall back on, you’ll need to take out a loan or use a credit card to cover the unexpected expenses.
With that in mind, you should start an emergency fund as soon as possible if you don’t already have one. Try to reach at least $500 to $1,000. From there, you can focus on your debts without having to worry about losing progress.
If you need cash immediately, take it out of your emergency fund, rather than taking on additional debt.
That said, it’s important to save for real emergencies—try not to withdraw any cash unless you don’t have another option.
Once you’re debt-free, you can start expanding your emergency fund to cover more serious situations. Even just $500 will go a long way in most cases, but it might not pay for losing your job, getting sick or injured, or other unpredictable circumstances. Saving around three to six months’ worth of expenses will help you get through nearly any situation.
Having money in your savings account also makes it much easier to minimize credit utilization. Using more than about 30 percent of your credit limit can hurt your credit score, even if you make payments on time. High credit utilization tells lenders that you may be spending more money than you have.
The Bottom Line
Living in debt can be overwhelming, especially if you’re also dealing with poor credit. While your balance won’t go away overnight, these tips will help you make progress more quickly and avoid setbacks on your path to becoming debt-free.
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.