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How to pay off debt quickly: Strategies & tips

At a glance:

  • Why it’s important to have good credit

  • How to create a plan to get out of debt

  • Trade unmanageable debt for manageable debt

  • Predatory lending: What it is and what to watch out for

  • How to get help from consumer credit counseling agencies

  • Summary of paying off debt quickly

  • Practical ideas you can start with today

If you find that there is still a week or two until your next paycheck and you're already broke, you may be suffering from too much debt. It's easy to fall into this trap. However, there is hope.

The way out of debt is lighted by a clear understanding of the reasons people fall into the trap. You need to know how much debt you can handle and the difference between manageable and unmanageable debt.

Sometimes it is not possible to handle this alone. In that case you need to know who you can turn to for help in getting out of debt.

Whatever the reason, if you can't pay your debts, you need not panic, nor do you need to stay stuck where you are. Debt problems are so common that many sources of help have sprung up to help people deal with them. You need only reach out to them.

Young woman checking bills, taxes, bank account balance and calculating credit card expenses at home

Why it’s important to have good credit

Credit allows us to immediately buy things we could not afford now. Most persons would not be able to purchase a house without credit. Most young adults do not have sufficient savings to afford the cost of even the most humble of homes.

Yet credit allows them to purchase a home that they can gradually pay off over time as their earnings increase. Also, the better your credit score, the better the loan terms will likely be for you. This can save you thousands and thousands of dollars over time.

Without credit, many individuals would not be able to purchase an automobile. Good credit not only makes this possible, but it can qualify you for a lower interest rate, which saves you a lot of money. And if you want to open the business you've always dreamed of? Most likely, you will need credit for that.

Businesses rely upon credit to manage their cash flow. Manufacturers borrow money to buy raw materials. Merchants buy goods on credit from manufacturers. Consumers buy goods from merchants on credit. Without credit, the process would slow to a halt. And if you have a job with a company that needs to use credit, you could end up losing it.

What if you're not looking to get a loan?

But suppose you're not in the market for a house or car or business. Good credit can still have a major impact on your ability to live your life. If you are a renter, you likely had a credit check done on you; your lease is, in a sense, a loan. A landlord wants to know that you are responsible with money and that you can pay your rent on time.

Some employers also do a credit check on you, thinking that if you are bad with credit, you will be irresponsible on the job. Clearly, having good credit should be a priority to you whether you actively use it or not. Good credit can mean that your financial situation – and your life as well – is on the right track.

If you want to stay warm in the winter and cool in the summer, you will want to make sure your credit is good, because you may need credit in order to get utilities established in your home.

Need insurance of any kind? Your credit standing will likely affect how much you pay for your premiums.

A final note

The companies that offer you products and services want to know that your credit is good. To them, credit predicts responsibility; bad credit indicates irresponsibility. Good credit can signify that your financial situation – and the rest of your life – is on the right track.

That is why good credit should be a big priority in your life; it will make your life easier, it will open doors for you, and it will save you a lot of money in the long run. Take the time to keep your credit good, and it will take care of you in turn.

How to create a plan to get out of debt

Figuring how much to pay toward your debt each month

If you set a priority of being out of debt by a certain date, you will need to determine how much you must pay each month until that date to reduce your debt payments to a manageable percentage of your take-home pay. This is particularly important if you have a lot of installment credit or credit card debt.

To calculate this amount, you will need a financial calculator. You can find free financial calculators on many Websites or in financial software you may already own. In the following paragraphs are the basics to determine how much you should be paying each month to eliminate your debt by your target date:

Determine the amount of debt and the interest rate to use

Determine how much debt you want to eliminate by the target date – this is the principal (P). For example, suppose you have several credit cards totaling $10,000 and a student loan balance of $10,000. If you only want to pay off all the credit cards and half the student loan in three years (you feel you can manage the rest of the student loan later), your principal will be $15,000.

Determine an interest rate to use. The highest rate from all your loans might be the best one to use, as it will help you calculate your way out of debt faster. Let's say that you have one credit card balance with $7,000 at 15%, another with $3,000 at 7%, and the student loan ($10,000) at 3%.

Choosing 15% as the rate (R) will help you calculate payments to most quickly reduce your debt. Of course, you could use a weighted average, but we will leave that for a mathematics textbook to explain.

Set the term (N) as the number of months or years to achieve your goal. In our example, we are using three years or 36 months.

The result

When you plug these numbers into a financial calculator, you will come up with a monthly payment (PMT) equal to approximately $520. This is the number you should use to get out of debt in the time you set as a goal. All you need to do now is to allocate how much of the payment should go toward each of the loans you are paying off.

The best way to allocate the payment is to pay off the highest-interest-rate loans faster than the lower-rate loans. In our example, we might allocate the largest amount to the 15% credit card, with lower amounts to the others.

If your calculated payment is still more than you can afford, you will need to consider refinancing methods. However, if this works for you, why not continue to make those larger monthly payments to your savings and investment plans after your debt is gone? This will help you stay out of debt.

Trade unmanageable debt for manageable debt

If you are like many people who find themselves with too much debt, you may need to consider refinancing or consolidating your loans. You might find yourself in a predicament where no matter how hard you try, you just cannot cut expenses any further or earn more income. The only solution is to lower your monthly debt payments.

There are only three ways to lower monthly debt payments: reduce the principal amount, get a lower interest rate, and extend the payments over a longer term. These three principles are used in refinancing and debt consolidation. Let's see how these work and then look at the advantages and disadvantages.

Refinancing: changing the principal, interest, and payback period

Refinancing debt means simply changing the terms of the debt agreement. This means that an old debt is replaced with a new debt, usually for the same amount, but with different repayment terms such as a new interest rate and repayment period. Refinancing can help those who find themselves with excessive debt because it allows a loan to be repaid with lower monthly payments.

Monthly loan payments can be reduced if a loan is refinanced with either a lower interest rate or longer payment period, or both. This is clearly an advantage to those with a cash flow problem. An advantage to a lower interest rate is that the cost of borrowing is lowered as well.

A longer payment period generally costs more for the borrower, since the interest payments stretch over a longer term – hence a more costly loan. Refinancing may involve costs that need to be considered as you determine whether refinancing is the right choice for you.

Advantage of secured long-term debt

There are many reasons why some loans have lower interest rates than others. Long-term loans generally have higher rates than short-term loans. Secured loans also have lower interest rates than loans for which there is no collateral. A mortgage, for example, is a long-term, secured loan. If you follow mortgage rates, then you know that they are lower than the rate for an unsecured personal loan from your local bank or finance company.

The problem with unsecured short-term debt

Many persons with excessive debt usually have many short-term unsecured loans or credit card debts with high interest rates. This puts a burden on the family finances because there are too many monthly payments, leaving little left to pay for ordinary family expenditures. If these people refinanced their loans, they might be able to reduce their monthly payments so they could better manage their finances.

One must be careful, however, to avoid stretching payments so long that doing so increases the cost of goods too much. For example, if you bought a TV for $1,000 with a revolving line of credit at 12% and paid it off in 12 months at $89 per month, the net cost would be $1,066.

That might be reasonable, especially if you got a good deal on the price to start. However, if that loan was refinanced to 60 months at $22 per month, the cost would go up to $1,335 – not such a bargain.

Predatory lending: What it is and what to watch out for

Predatory lending occurs when a bank or financial institution takes advantage of you by charging higher than normal interest rates, unreasonable fees, and certain other charges.

Predatory lending can occur on many different kinds of loans and financial products, including mortgage, car, payday, tax refund, car title and home equity loans; credit cards; bank accounts; and debit cards.

Payday lending alone, just one aspect of predatory lending, costs Americans $9 billion in fees each year, while markups on interest rates for car loans add $26 billion in interest costs every year for families.

Signs of predatory lending

There are many signs to beware of that can be helpful in avoiding a predatory lending situation before you take out a loan. By reading the fine print in any loan and asking questions before finalizing the loan, you can protect yourself and your family and save money.

The signs of predatory lending include:

  • Pre-payment penalties: Loans that charge high fees for paying the loan off early.

  • Excessive fees: Fees that can be financed into a loan that exceed 5% or more.

  • Higher-than-average interest rates: Rates that significantly exceed competitive interest rates where brokers, finance companies and banks pocket the difference between the competitive rate and the higher rate.

  • Exploding adjustable interest rates: An interest rate on an adjustable rate loan that spikes higher.

  • Repeated refinancing: Encouraging consumers to repeatedly refinance a home with high fees and points for each refinance that drain a home of equity.

  • Hidden balloon payments: A large payment at the end of a loan period that may run into tens of thousands of dollars and that isn't revealed up front.

  • Bait-and-switch loans: A loan with a high interest rate and fee that is sold in place of a loan with lower rates and fees.

  • High fees on tax refund loans: Interest rates on these short-term loans can exceed 500% and come loaded with administrative fees.

Laws against predatory lending

There are numerous state and federal laws designed to curb predatory lending. Fifteen states have banned payday loans with high interest rates, while others limit the number of payday loans that can be taken out by a consumer in a year.

Congress passed the Military Lending Act in 2007, which is designed to protect military families against predatory lending. It caps annual interest rates for most consumer loans to military borrowers at 36%, outlaws car title loans to military personnel, and requires disclosures of interest rates and payment obligations before a loan is made.

The federal government also put in place new rules designed to protect homebuyers from predatory lending in mortgage lending. Lenders must make a mortgage loan based on the buyer's ability to repay as determined by their credit history, current income, and other factors. In addition, mortgage originators must be licensed, qualified and registered, and appraisers must be independent.

Help for predatory lending victims

If you believe you've been a victim of predatory lending, the federal Department of Housing and Urban Development has assembled an online resource that can help. Mortgage News Daily also offers a comprehensive list of resources for victims, which can be found online here.

The Consumer Federation of America provides an online booklet on how to resolve a variety of consumer complaints. If you need help from a lawyer but can't afford to pay for one, you can locate legal help through or

How to get help from consumer credit counseling agencies

If you are facing financial difficulty, a consumer credit counseling agency can help restructure your payments so you can pay them off easier. That may mean consolidating your payments, or getting your creditors to lower the minimum payment or restructure the payment cycle to help you repay the debt more comfortably.

The agency will contact the creditors, explain your situation, and establish a repayment program that benefits everyone.

The agency starts with you

The agency reviews your income, outstanding debts, and other financial needs. It is important for clients to be completely honest about their financial situations. The more the counselors know, the more they can help.

The agency then works with your creditors

The agency counselor then turns to the client's creditors to negotiate more favorable repayment terms. Often, creditors will accept smaller minimum payments and eliminate late fees. Sometimes they will waive a portion of any accumulated interest.

The various payments are then bundled into a single monthly amount and presented to the client. These payments are made to the consumer credit counseling agency, which in turn pays the creditors.

Generally, the first step in stabilizing someone's finances is payment consolidation. Consumers hand over their bills to the agency. The agency then collects a single monthly payment from the client and divides it up among the various creditors.

Services provided

Other services the agencies provide include the following:

  • Budgeting

  • Financial education

  • Debt counseling

  • Financial planning

Getting your credit restored

When you repay your debts by successfully completing the agency's debt management program, department stores, credit card companies and other lenders will likely reinstate your credit. If you use the privilege responsibly, and consistently make your payments on time, you will rebuild your credit rating. Paying your debts, in part or in full, is always better than not paying them at all.

How these services are paid for

To pay for these services, the agencies may charge an up-front fee, ask for monthly payments, or both. Creditors will also pay the nonprofit organizations a small percentage of the funds they collect. Foundations and government agencies also provide funding.

For more information

For a list of reputable services, contact the National Foundation for Credit Counseling ( or 800-388-2227), the Financial Counseling Association of America (, or the Better Business Bureau (

It is a good idea to check a couple of these organizations to see what services they will provide and how much their fees are. Reputable firms charge customers low fees – creditors pay fees to credit counseling services, which saves you money. The U.S. Department of Justice maintains a list of approved credit counseling agencies at this link.

The cons

But there is a downside to working with consumer credit counseling agencies, too.

First, these agencies do not guarantee protection. If you miss a monthly payment to the agency, you are on your own. All it takes is just one creditor to begin collection actions, and your debt management plan comes to an abrupt end.

Second, if you agree to a consumer credit counseling agency's debt-management plan, you agree to pay all debts in full.

Summary of paying off debt quickly

Bottom line: Do what you can to keep up with your debts.

Different debts have different effects on your credit and your finances. If you are in a prolonged and difficult financial situation, it certainly can't hurt to contact a creditor or lender and explain this to them. Many of them will work with you to craft a means of repayment; the alternative can be a lengthy legal fight and lost money.

The results on your end will usually always be negative, however: a bad credit score and difficulty getting loans or services in the future. Weigh your options carefully, and seek consumer credit counseling if need be.

Here are some ideas to begin with:

Practical ideas you can start with today

  • Determine what percentage of your take-home pay goes toward paying off debt.

  • Contact creditors for any debts you think you’ll fall behind on. Work out a payment plan for them.

  • Make a list of all of your debts. Determine which are essential to pay on and which can be deferred for a while.

  • Contact a consumer credit counseling agency.

  • Create a budget that allocates as much as possible toward debt reduction.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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