Back to Blog
If you have debt, you're in the right place! This is a how-to article taking you step by step through the quickest way to pay off your debt. Let's get into it...
How to get out of debt: The debt attack strategy
Alan and I like to get things done quickly. Once we decide to do some thing we like to find the fastest way from point A to point B. This is our guide to the fastest way to get out of debt for you. The image below shows the overall strategy, then read on for an explanation of each of the steps.
We've put some ideas under each step - do all of the steps but you don't have to do ALL of the additional ideas. Don't get overwhelmed, just pick a couple to start with and get some momentum. Progress and taking action trumps perfection every time!
What type of debt are we talking about here?
We're talking about *expensive* debt here, anything with an interest rate of more than 5%
You're probably wondering about student loans and how/when/if to pay these off. Read on to the end for our thoughts on those.
What we aren't talking about is your mortgage. Mortgages are traditionally lower interest rates and take time to pay off. This is all about store cards, credit cards, overdrafts and other unsecured debts.
Let's get into the practical steps
1. Get crystal clear on what your debts are
Clarity is power here. You need to understand what debt you have before you can come up with a plan for paying it off.
WARNING! This step *might* bring up some emotion. You might be annoyed at past you for getting you into this pickle. You might be disheartened at how much debt you have. You might be pleasantly surprised and relieved that it wasn't as much as you thought. Expect the emotion. Expect stuff to come up. Whatever the emotion you feel, notice it, breathe through it and move onto the next step. We got you! And the final step of the process is going to make sure you're never in this situation again. Ok, onto the first step....
For each of your debts (car loans, store cards, credit cards, personal loans...), find the paperwork and get clear on:
Put all the debts in a table like this one.
Include 0% cards, this is a temporary situation. It won't always be 0%. You have to pay these off too. You can't just keep shifting it to 0% cards forever. Your calendar is your friend. Set a reminder a month or so before the deal ends so you can work out what you want to do with that debt and so you won't be surprised when they start charging you interest!
2.Can you pay off any of the debt immediately?
There are some ways you might be able to raise some cash straight away. Can you sell any liabilities?
We’re not telling you that you have to give it up forever. Store it on gumtree/craigslist until you can afford it. What we mean by this is sell it on these platforms (or something else like Facebook Marketplace). You can always buy it back (or one very similar) when you're in a better financial position.
This has a double whammy because you'll get the money from selling the liabilities AND you'll stop paying for them each month.
We are always amazed at how many people have thousands of pounds of debt at a high interest rates like 30% plus and then £5000 sat in a bank account earning 3% interest. You are literally funding the banks by doing this.
Keep the £1000 emergency fund but use anything else you can to pay off the debt as quickly as possible.
3.Can you increase monthly repayments?
How much a month can you put towards paying off the debt? How might you reduce your spending elsewhere or increase your income? Widen the gap between income and expenses as much as you can! Trim the fat
How to increase income:
How to reduce spending
These are some ideas to reduce spending.... some are more extreme than others! Pick the one(s) that work for you. Remember this is a menu of ideas and you don't have to do them all. The further you can reduce your expenses the quicker you can get out of debt.
You may have already done a lot of these and that is ok too. Go back and look at increasing income if you can't reduce expenditure. There is no ceiling to how much you can earn, but there is a floor to how much you can reduce your expenses!
The whole purpose of this section is to do what is needed to create a gap between your income and spending. if there is no gap, i.e. you are spending everything you earn every month then you will never pay that debt off. not only will you never pay if off but it compounds against you.
We met one family on Rebel Finance School that were making minimum payments on their debt but the interest rates were so high that they would have never paid it off. We need to get you free of this debt.
4.Reduce interest rates
Can you negotiate lower interest rates with your credit card company or get a 0% balance transfer?
Could you get a cheap(er) personal loan?
BEWARE commercial debt management companies. They are there to make money out of you
The best way to do this is to call them on the phone and talk to them. Tell them you can't afford the repayments. Tell them the debt is crippling you. Tell them you are going to need to move else where to get on top of it Ask for a reduction in interest rates and then go silent. SILENCE is so powerful when negotiating.
You might be thinking "Can I really negotiate with banks? credit card companies?" The answer is YES! You have more power than you think you do. It might not feel like it right now but you do.
We worked with one couple that called the bank about their overdraft that was at a crippling 49% interest rate and challenged them. The bank immediately put the rate to 0% and gave them time to repay it. This saved them years off their repayments and thousands of pounds
Be prepared for a "NO". They aren't all going to play ball, but you don't get hat you don't ask for. If you don't ask for a reduction you won't get it. Call them all, talk to them. Be brave and take these leaches on. They are sucking the financial life blood out of you. They are literally living off you financially.
Time to remove the financial leaches and look after you.
5.List all your debts in descending order of interest rate (highest first)
NOT in order of balance. This way you will pay the least amount of interest. If you have multiple 0% cards, put the deal that ends soonest first. Check out our YouTube video for a detailed example of how to do this.
6.Put as much as you can towards paying off the first one on the list
Pay the minimum payments on all debts AND put any and all additional cash towards paying off the first debt on the list. The key is to attack the debt with the highest interest rate with all your resources. Tackle that sucker!
Apply all of your financial resources and focus to destroying the debt with the highest interest rate. Some debt strategies talk about tackling the debt with the smallest balance first and this is mathmatically not the best way to tackle debt.
Doesn't matter the balance, what matters is the interest rate. Tackle the one with the highest interest rate first!
When you pay off a loan or card, roll that payment into the next one on the list. Never lower overall repayment amounts. Keep rolling each one you pay off into the next one. This build momentum and helps you tackle the debts quicker and quicker.
Always do this in order of interest rates. So you pay off the debt with the highest interest rate first. The one below that has until this point been set to minimum payments. Now it is time to roll what you were paying to get rid of the highest one into paying the second highest interest rate one.
You do this in order as you go down the list. It is a simple strategy but it is mathematically the most efficient way to pay off your debt.
8.Keep going until you are (expensive) debt free
Celebrate your freedom! Maybe have a picnic or do a little jig in the kitchen. Freedom has never tasted so good!
Maybe post it in the Rebel Finance School Facebook Group and tell us all about how it is going and what you are up too! Progress should be celebrate.
There is no shame in having got into debt in the past. These things happen. All we want to do is help you tackle this in the moment and get free now.
9. How are you going to make sure this never happens again?
The system is out to get you. There are teams of highly educate people out there who's job it is to persuade you to go into debt. They spend all day every day telling you that you deserve it for working so hard or that you only live once so put it on the credit card.
Don't fall for this advertising. You don't deserve debt. And you do only live once so don't spend it in debt, in servitude to big financial companies working to pay off your loans.
Here are some ideas for how you could stop this ever happening again:
This is the tool Katie uses to work out what order you should pay off your debts and how long it will take: https://www.vertex42.com/Calculators/debt-reduction-calculator.html
When it asks you to choose which strategy you want go with "Avalanche". This puts the debts in descending order of interest rate. This is the mathematically most efficient way to pay off debt.
Student loans - UK
People always ask us whether they should pay off their student loan before they start investing. This is a complicated question! The interest rate you pay depends on when you took the loan out and, for people who went to university in more recent years, what tax bracket you are in.
Money Saving Expert has some excellent articles on this
And here's the official government website for UK Student Loans
People often ask us about ways to make their earnings look lower so that they don't have to pay off their student debts. (In the UK, repayments are based on how much you earn and are wiped out after 30 years.) To me, this feels like cutting your nose off to spite your face. Playing a game to try and minimise your earnings is the wrong thing to focus on if you're aiming to sort your finances out. Focus on maximising your earnings and paying your debts off so that once those are gone you can quickly accumulate wealth.
You are NEVER worse off earning more. The more you earn the quicker you can get onto more exciting things after getting rid of the debts.
As ever, this is NOT binary. If you have some savings that are earning less than the interest that's building up on the student loan, consider paying off at least some of the loan. For example, if you are not yet earning enough to have to pay anything back but you are earning some money and have a reasonable gap between your earnings and expenses, consider paying down the interest that's building up so at least it's not compounding against you.
CAVEAT: this depends on age and amount of debt. If you're 25 with £30k of student debt, just get on with it. If you're 50 with £300k of student debt we need to think through the options. Of course this is after more expensive, higher interest rate debt like credit cards.
Don't take our word for it, read the Money Saving Expert articles and watch his videos and see what you think.
Student loans - USA
Choose FI is a financial independence podcast whose ex co-host Jonathan had a LOT of student loan from studying to become a pharmacist. This article talks you through the things to think about when you're considering paying off your student loan: https://www.choosefi.com/paying-off-student-loans-vs-investing/
Further help on debt
This article from Money Saving Expert has some additional tips and ideas for how to pay off debt as quickly as possible: https://www.moneysavingexpert.com/loans/debt-help-plan/
Forgive past you and get on with it
The best time to get on top of your finances is right now! Now is the time to forgive past you for putting you into this pickle.
You might feel a bit down when you've looked at how much debt you have. You might be thinking your debt is going to take a long time to get rid of and feel overwhelmed by it and want to run away and hide. I feel that way sometimes!
Remember, the time is going to pass anyway so you might as well make a start now. We wrote an article about starting something that seems insurmountable that will help you and inspire you to get going.
Please let us know how you get on and tell us what you think of the article.
It's up to you!
This is how we think about debt. As always, don't take our word for it!
Do your own homework and research and think about whether this is right for your circumstances. We are not financial advisors. You are responsible for your own financial future. Read our full disclaimer here.
Rebel Finance School