how to clear debt as quick as possible?

Debt is a term that isn’t fun at all. It can be a source of great stress for many and reduction of quality of life for others. Many people are looking for ways how to clear debt. The ones who aren’t – can’t admit the size of the problem to themselves yet.

The above doesn’t refer to you having a mortgage or a finance agreement that you are on top of. When I say debt I mean the amount of money you own that you regularly pay interest on without a plan to getting out of.

Clearing your debt is all about self discipline, having a solid plan in place and sticking to it. I will share my views on how to clear your debt below. Most of the below is not rocket science however people often just need a reminder on what needs to be done.  

Budgeting is a start to clear debt

Having a clear plan is the first step here. And a personal budget is the best tool to be used as a plan to your personal finance. This can really help you understand your income and expenditures. Make sure to include all of the depth on there as well that needs to be cleared.

When creating a plan make sure you start with a clear summary of all money coming in and going out monthly. Prioritise things like mortgage payments, council tax, any finance agreements, utilities and bills for those, etc.

Include the amount of money you spend on entertainment as well. This bucket I would say is something that you can reduce if required. Having a couple of takeaways less a month can help you clear the debt you might be sitting on.

Doing the above exercise will really highlight to you where your money goes. Simple maths at the end of the task will also give you an understanding of how much of your money can go towards clearing your debts.

prioritise high interest debt

The first step to clearing debt is making sure that you are paying more than the interest that you accumulate. Based on the above, paying out dept with the highest interest should be your top priority.

Below is an image of two imaginary debts a person might have. The larger one has a higher interest rate of 18%(credit card). While the smaller one is way cheaper in terms of interest you have to pay – only 5%(bank loan).

Many people would choose to clear Bank Loan first so it feels like they have one less debt to pay. This actually doesn’t make much sense due to the cost both of these have. As you can see, the interest charged on Credit Card in this example is significantly higher. What actually matters here is the overall amount of debt and the interest you pay on all of this.

Firstly, I would start with paying off Credit Card debt as quick as I can. You want to always get rid of high interest debts before looking at the cheaper ones. The only thing to consider – keep up with minimum required Bank Loan payments so you don’t incur any extra penalties.

consolidate debt

In the scenario above, the other option I would actually explore is seeing if I could move any of my debt from Credit Card to Bank Loan. While this wouldn’t reduce the amount of depth I have to pay back, this would reduce the average interest rate that I’m paying.

If I would manage to move all of my debt from Credit Card to Bank Loan I would straight away reduce my annual interest charges by 13% without paying a penny. That’s nearly £400 annually in the above scenario. This would allow me to use that extra money to pay off more depth. As a result, I would be debt free quicker.

The other benefit to consolidating your deaths in one place is the fact that you can see and manage all of the debt easier. Based on the above, it only makes sense to do so if you are actually getting the lowest possible interest rate on it. No need to consolidate if your interest payments increase as a result.

credit cards can help clear debt

Credit cards can be a really powerful tool to help you clear your debt as well. Not all credit cards are the same – they don’t always charge you interest rate… at least not straight away. To learn more about different types of credit cards – please read this article.

This option will only be available to people with fairly strong credit score. This is where maintaining your credit history can actually pay you some dividends back.

You could use a balance transfer or money transfer credit card in order to consolidate your debt and pay less interest rate at the same time. Both credit cards can give you an interest free period to pay your debt back.

You can use these to pay off your debt that you’re currently paying interest on. As a result you will start paying off new debt of the same size however without paying any interest. The biggest watch out here – make sure you understand the interest free period and other terms that the lender might have.

The last thing you want – pay even higher interest on the debt you consolidated.

debt helpline is also available

This is another potential source of help to keep in mind. If you are unable to clear your debt on your own then there is a helpline to get advice from.

Give these guys a call and see what help they might be able to give you. There are plenty of complex solutions available to help you become debt free. They will be able to explain you these and advice what is the best route for you to take in your current situation. Their contact details can be found here.

summary

I hope that debt is not something that you will ever have to be thinking of and losing sleep over. If you do ever end up in this sort of situation it’s good to have a clear strategy and a way out of this trouble.

Keep in mind that debt can be seen as a numbers game. It’s all about getting rid of debt that cost you the most first. Once you’re done with that, move on to the second most expensive.

Create yourself a budget to help you guide and understand how much you are able to spend. Make sure to stick to your budget and prioritise paying off debt. Understand what debt cost you the most and focus on that.

Consider using financial tools like credit cards in order to facilitate the process of paying off your debt. Be careful with these tools – they can be both extremely powerful and really dangerous if used incorrectly.

If you are not sure on how to clear your debt on your own there are helplines available and advice you can benefit from. There is no shame or harm in asking for help.