Paying off debt is an enormous task, one that many Canadians fail to accomplish. It takes planning, hard work, and perseverance – but it is so worth it. The best way to be successful with your debt repayment is to pay it off as quickly as possible. The longer it takes to pay off your debt, the more likely you are to fall off the wagon or have an emergency that sets you back significantly. Given that, here are my top tactics for busting your debt quickly.
The Snowball Method
The debt snowball is a method of debt repayment where you list your debts from smallest to largest, and pay them off in that order. For example, let's say you have $5,000 in credit card debt at 19% interest, a $10,000 car loan at 5.2% interest, and $15,000 of student loans at 5.9% interest. If you used the snowball method, you’d pay them off in that order, from the smallest amount (the credit card) to the largest (the student loans).
The idea behind this debt repayment method is that by paying off the smallest balance first, you’ll get a quick win and reinforce your debt repaying habit.
Highest Interest Rate First
Another method of quickly paying off debt is to tackle the debts in order from the highest interest rate to the lowest interest rate. In this case, you would address the debts above in the following order:
• $5,000 in credit card debt at 19% interest
• $15,000 student loans at 5.9% interest
• $10,000 car loan at 5.2% interest
This method requires you to tackle the higher interest student loans before the lower interest car loan. I prefer this method because it minimizes the amount of interest you’ll pay over time, which will help you pay off your debt faster.
The downside of this approach is that it’ll take you longer to see results and get rid of particular debts.
The Snowflake Method
When it comes to paying off debt, I always say that every dollar counts, and that’s where the snowflake method comes in. The snowflake method involves chipping away at your debts using every dollar available to you, and I mean every dollar. If you have $5 sitting unused in your chequing account, that money needs to go directly to your debt, every time.
Here’s how you unleash a blizzard of snowflakes on your debt: if you have automatic payments set up to come out of your chequing account every month for your student loans or car loan, add those loans as payees in your online banking. You’ll probably need the name of the institution and your account number to do so. Then make a $1 deposit to verify the connection has worked (check it by logging into your student loan or car loan account).
Once you’ve verified that the $1 payment has been applied to your loan, you now have a quick and easy way to make extra payments on your debt. If you’ve got an extra $10, $100, or $1,000, don’t think, just put that towards your debt.
Bust Your Interest Rates
Paying down high-interest debt can often feel like taking two steps forward and one step back. This is because the interest that you are charged on the debt is so high that it can add hundreds of dollar per month to your loan balance. A good way to speed up your debt repayment on high-interest debt (and all debt, really) is to try and lower your interest rate. You can do this one of two ways:
You can call your service provider and ask them to lower your interest rate. Explain that you are trying to pay off your debt and see if there’s anything they can do for you.
If that doesn’t work, you have another option: you can transfer your high-interest debt to a lower interest debt. Two common options are lines of credit, and 0% interest balance transfer credit cards.
In both cases, you need to be careful that you don’t run up a balance on your original card. Otherwise, you’ll be back to square one. If you are transferring your credit card debt to a 0% interest credit card, make sure you have a plan to pay the debt off before the 0% interest period expires. If you don’t, you’ll be hit with hefty penalties.
A line of credit will have a higher interest rate than a balance transfer credit card, but a lower interest rate than a high-interest credit card.