How to Become Debt Free Fast

Getting into debt is fast and easy. It can be as quick as swiping that new credit card at the register or clicking the check out button on Amazon. Paying back that debt, however … let's just say it takes a bit longer to accomplish.

Now, debt can take many forms. It can be that credit card I mentioned, a student loan for classes, a car note, or even a mortgage. Although each of these operates a little bit differently, they each have a few things in common like interest rates, repayment schedules, and late payment penalties.

But with the right knowledge about how they work under your belt, you'll be able to tame the debt beast and make debt your servant instead of being under its thumb.

How You Got Here in the First Place

The first step in getting out of debt is knowing how you got into it in the first place. For most people, getting into debt wasn't something they sat down and planned on. Sure, it's obvious that most people need to get a mortgage if they're going to buy an expensive home. But when you're excited about going to college, how much of your time do you spend going over your student loan paperwork? Do you compare interest rates for the loans? Do you calculate how much interest they're going to cost you and when your repayment dates will be? Probably not. You're more focused on what classes you'll be taking and what books you'll need for them. It's only after all the dust settles and you're actually getting close to graduating that the thought of how you're going to repay those loans hits you.

And it's the same for when you go out to buy a new car. Sure, you sit down with the guy in the Finance Department and he quickly goes over your payment options. But how much do you really understand about all those closing fees and financing options? Should you get the extended warranty (which is conveniently wrapped up in the cost of the loan) or not? Is the interest rate you'll be paying fair or should you shop around?

Here's the bottom line: Ignorance is expensive!

Let me say that again “Ignorance is Expensive!” Not knowing how debt works can cost you hundreds if not thousands of dollars and keep you enslaved to it for years. When is the last time you took a class on personal finance or read a book on it? When have you comparison shopped for interest rates on loans and actually understood the difference in how they scheduled the payment dates? Not knowing how debt works is one of the most critical mistakes people make on the way to financial independence.

So what can you do about it? Educate yourself. Ask questions. Get answers. Don't let anyone take advantage of your ignorance. No one cares more about your money than YOU!

So, what is debt anyway?

Debt is pretty straight forward. You go into debt when you want something you either don't have the money to afford to buy right now or you don't want to spend the money, but want the item anyway.

Some examples of debt are:

  • using a credit card and not paying off the balance when the payment is due
  • taking out a student loan for college
  • buying a car on credit
  • taking out a mortgage to buy a house
  • taking out a payday loan from a cash advance business.

Interest Rates: The Big Question

Almost all types of debt come with an interest rate attached. Now you may be thinking that interest rates aren't all that difficult to understand but actually, they can be very confusing to decipher. For instance, on credit cards you need to find out what your APR (Annual Percentage Rate) is and divide this by 365 days in the year. Then find out how much your balance is on each separate day of the month. Once you know that you multiply the daily interest your calculated above by your daily balance for each day. Add them all up and that's how much interest you'll have on your credit card this month. Sounds easy, right? But that's not all. If you have late fees you'll need to calculate the interest on those as well. And that's just for one of your credit cards!

The Rule of 72: How Interest Stacks Up Against You

Interest is a two-edged sword. It works in your favor when you invest your money and against you when you get into debt. One of the easiest ways to understand compounding interest is through something called the Rule of 72.

The "Rule of 72" is a simplified way to calculate how long an investment takes to double, given a fixed annual rate of interest. You divide 72 by the annual rate of return you receive on your investments, and that number is a rough estimate of years it takes to double your money.

That’s great but … it can work against you too! For example...

How to Become Debt Free Fast

Now that I've shown you the downside of getting into debt, let's talk about ways you can become debt free fast.

Credit Cards

Credit cards are a two-edge sword. On the one hand, their use makes life convenient and their responsible use is one of the best ways you can use to raise your credit score.

The Positive Mindset behind credit cards:

  • Credit cards are meant for you to get a line of credit and establish a credit history
  • You use them to established credit by making 12-24 months of on time payments
  • Carrying a monthly balance should not be a way of life.

But, if used in the wrong way, credit cards are one of the easiest ways to ruin your credit score and cost you hundreds if not thousands of dollars in interest. For many people, they're just too convenient and that's the rub. They get used to buy anything from eating lunch to buying a new outfit to going on a cruise. Before you know it, you've racked up thousands of dollars in debt with the promise that you only need to make your 'minimum monthly payments' to keep in good standing. But what if all of those wonderful minimum payments are more than you can handle? How do you fix it?

The Debt Snowball

The basic idea of the Debt Snowball is that you apply an extra amount of money every month to your smallest debt until it’s paid off, and then take the amount you were paying for that debt and apply it to the next biggest debt, and so on until you’ve paid off all your debts. It sounds simple, but it’s very powerful.

Here are the basic steps:

  1. List all your credit card debts from smallest balance to largest balance.

  2. Commit to paying the minimum due on each card each month.

  3. Find an extra amount (on top of the minimum) that can be applied towards the smallest debt — this amount is your “snowball” amount. (It can be as little as $10 to $20 a month. Trust me, it adds up!)

  4. Pay the minimum payment plus the extra amount towards that smallest debt until it's paid off.

  5. Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt — your snowball amount has just gotten bigger, and will get even bigger after each debt is paid off.

  6. Repeat until all credit card debts are paid in full.

The power of this process is that you get a little mental boost of joy when your first debt is paid off and that gets you to stick with the program until all of them are down to zero. Each time you pay off another one, give yourself a little mental party and a pat on the back. You're on the way to becoming debt free!

The Debt Avalanche

The Debt Avalanche works much the same as the Debt Snowball except that instead of sorting your debts from smallest balance to largest balance, you sort them from largest interest rate to smallest interest rate.

Here are the basic steps:

  1. List all your credit card debts from largest interest rate to smallest interest rate.

  2. Commit to paying the minimum payment on each card each month.

  3. Find an extra amount (on top of the minimum) that can be applied towards the debt with highest interest rate — this amount is your “snowball” amount. (It can be as little as $10 to $20 a month. Trust me, it adds up!)

  4. Pay the minimum payment plus the extra amount towards that smallest debt until it's paid off.

  5. Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the debt with the next highest interest rate — your snowball amount has just gotten bigger, and will get bigger after each debt is paid off.

  6. Repeat until all credit card debts are paid in full.

This method will get you out of debt faster than using the Debt Snowball but many people find it harder to stick with since it doesn't get you the mental boost of joy as fast.

So how do all your other debts work with these two methods? You can either include them in the method or just keep making the minimum payments on them as usual. Since credit cards almost always have a higher interest rate than mortgages, car notes, and student loans, they're the ones you usually stress about the most. After paying them off, then you can use the Debt Snowball or Debt Avalanche on your remaining debts.

Paying off College Debt: Using Deferment and Forbearance to Your Advantage

Student loans are a bit different from other types of debts. Under the current federal laws you must repay them. There's no ignoring them and hoping that they'll go away. There's no bankrupting out of them either. They MUST be repaid. That being said, they're actually not as bad as you may think as far as repaying them is concerned.

Student loans offer two very good ways to postpone repaying them: Deferment and Forbearance. Here's how the two of them work.


With Deferment, while you won't have to make any payments for a period of time, you also won't be making any progress towards paying back your loan. If you’re granted a deferment, you'll still be responsible for paying the interest that accrues during the deferment period and so the balance you'll ultimately owe will be higher.

If you're enrolled in an eligible college or career school at least half-time, in most cases your loan will be placed into a deferment automatically based on enrollment information reported by your school, and your loan servicer will notify you that the deferment has been granted. You'll need to submit a request to them with documentation showing that you meet the eligibility requirements for the deferment.


Forbearance acts a little bit differently. First, Forbearance takes effect after you're finished with school. With Forbearance, you won’t have to make a payment, or you can temporarily make a smaller payment. You can request a general forbearance if you're temporarily unable to make your scheduled monthly loan payments for reasons related to financial difficulties, medical expenses, or changes in employment.

A general Forbearance is granted for a maximum of 12 months at a time but if you’re still experiencing a hardship when your current forbearance expires, you may request another one. This caps out at a cumulative limit of three years.

The Upside to Deferments and Forbearances

These two options for putting off the payment of your student loans have a couple of benefits. First of all, during the time they're in effect, it'll look like you're making your student loan payments each month when it comes to your credit report. This will actually result in your credit score going up over time (assuming you're paying your other bills in a timely manner).

Second, student loans have some of the lowest interest rates of any debt you can have. While your loans are in Deferment or Forbearance, use this time to pay off your high interest rate credit cards, car loans, and mortgages. This can save you hundreds if not thousands of dollars in interest over time. When you finally get back to paying on them, they'll be less of a burden on your monthly finances and you'll be in a better position to pay them off faster.


Buying a home is usually the most expensive purchase that most families will ever need to pay for. It's also one of the most rewarding. The process can be intimidating but with just a few simple financial tools under your belt, you'll be able to save yourself thousands if not tens of thousands of dollars in interest along with years of mortgage payments.

The 50/25 Rule

You pay half, but only get a quarter. Believe it or not, that’s how your standard mortgage payment is computed. Take a 30 year mortgage for example. As a homeowner, you make your monthly payments for the first 15 years of the loan. At that time you'll have only paid off about one quarter of the total loan amount. That's because most of those first mortgage payments go towards paying interest on the loan.

On a typical, 30-year mortgage of $100,000, a homeowner will not actually pay off half the original mortgage amount until year 23. And by the time a 30 year mortgage is paid off, you will pay almost three times the original loan amount - that's three times the original house price!

Now here's something even more disturbing. What happens if you refinance your mortgage in the desire to lower your interest rate? You start the cycle all over again! And a lot of people refinance their homes every ten to fifteen years! They'll never get their mortgage paid off at that rate.

The Power of Bi-Weekly Payments on Mortgages

So what's a great way to beat the 50/25 Rule? Set up biweekly mortgage payments. Take your monthly mortgage payment, cut it in half, and pay each half every two weeks. That's the same amount you'd normally pay each month but due to the effect of compound interest, you can actually pay off your mortgage faster and pay less in interest. (Normally, you make 12 payments per year and by paying bi-weekly you will make the equivalent of 13 monthly payments per year.) Using this method you can take a 30-year mortgage and pay it off in only 22 years. That's eight fewer years of mortgage payments and interest!

Now a word of caution about this method. Many lending institutions do not want you to use this method because it cuts into their interest revenue and so they don't make it easy for you to set up these by weekly payments. Some even charge a one time set up fee if you convert from monthly to bi-weekly payments. What's my solution to this? Shop around! There are a ton of banks and mortgage companies competing for your business. Keep looking around until you find one that's willing to work with you, their customer.

Other Debt Payment Solutions

At this point you might be asking “Okay, Steve, now those solutions may work for most people but I'm in way over my head! What do I do?” Well, there are still a few methods you can use to help yourself get out of debt.

Debt Settlement - also known as debt arbitration, debt negotiation or credit settlement

This is an approach to debt reduction in which the debtor (you) and creditor (who you borrowed money from) agree on a reduced balance that will be regarded as payment in full. A lot of times you'll get an offer in the mail from a debt collection company offering to lower the balance you owe if you make a one-time payment or a series of accelerated payments. This can often save you hundreds, if not thousands, of dollars off what you owe. Just be careful and get a signed agreement to the terms before sending in any money. Also, make sure you receive proof that the debt has been satisfied in full.

Debt Consolidation - entails taking out one loan to pay off many others.

This method is often taken when you want to secure a lower interest rate, secure a fixed interest rate, or for the convenience of servicing only one loan instead of making a lot of small payments every month. One of the most popular ways people use this method is when they refinance their home and use the equity they've built up in the home to pay off credit cards and other debts. If you're considering this, remember what I said about the 50/25 Rule. When you refinance, you're starting over with a brand new mortgage with most of each payment going towards interest and not principal. Replacing high interest credit card debt with a low interest mortgage can make sense financially. Just make sure you can make bi-weekly payments to accelerate your mortgage payments too.

Credit Counseling - often involves negotiating with creditors to establish a Debt Management Plan for you.

When Debt Settlement and Debt Consolidation aren't options for you, sometimes you can work with a Credit Counseling service to work with your creditors on a plan for paying them back. Usually the Credit Counseling service accepts payments from you and passes them on to the creditors after taking a small fee for acting as the intermediary. Their role is to act as an accountability partner for you and to provide assurances to your creditors that you're going to be staying the course in making your payments on time. While this method can be a great way to keep you on track and to help you build up the habit of being financially responsible, you need to be careful when selecting a credit counselor to work with. Although there are many reputable organizations out there who can help you, there are also many who take advantage of vulnerability people who are in debt. They overcharge for their services or don't pass along the payments in a timely manner. Do your research. Remember, it's your money we're talking about. Make it work in your favor.

When all else fails ...

Now we're to the part about getting out of debt that many people hate to face … bankruptcy. The thought of filing for bankruptcy gives many people a sense that they've somehow failed. They feel that if they've gotten to this point, they're bad at managing their money and somehow inferior to the people of the world who are making good financial decisions. Well that's a load of you know what.

There are plenty of reasons for filing for bankruptcy which have nothing to do with how good you are at managing your money. One great example is that one of the main reasons people file for bankruptcy these days is because of medical debt. With the rising costs of medical care, one serious illness can knock even the most financially responsible person off the rails. Think about the person who has had a good steady job for years and then gets diagnosed with cancer and can't work anymore. On top of their medical bills, their mortgage or rent still comes due, their utilities still need paid, and they still need to feed themselves and their family. After their savings dry up and they've tapped out all their credit cards just to keep things going, bankruptcy doesn't look like such a bad idea.

When it comes to bankruptcy, you generally have two choices:

Chapter 7 bankruptcy – you're allowed to keep certain exempt property but most of your other debts go away.

In this case, some debts are still with you (such as real estate mortgages and security interests for car loans). Other assets, if any, are sold (liquidated) by an interim trustee (appointed by the bankruptcy court) to repay creditors.

Common debts which can't be discharged through this type of bankruptcy include child support obligations, income taxes and property taxes less than 3 years old, student loans, and fines and restitution imposed by a court for any crimes committed by you. Spousal support is likewise not covered by a bankruptcy filing nor are property settlements through divorce.

Chapter 13 bankruptcy - allows you to undergo a financial reorganization supervised by a federal bankruptcy court.

In this case, you work with a court appointed counselor to develop a debt repayment plan in which you pay a portion of each debt with the balance being discharged. The amounts you can have discharged vary based on your income, the amount of the debts, and your ability to repay them. Basically it's a form of debt consolidation with the court as the credit counselor. Also, you'll need to attend debt counseling classes before the bankruptcy is finalized.

Post-bankruptcy Pitfalls: Bankruptcy isn't a Get Out of Jail Free card

Bankruptcy can have a huge impact on how soon, if ever, you reach financial independence. For several years following the closing of a bankruptcy case, you'll have the opportunity to obtain new credit cards, new car loans, and other types of debts. However, keep in mind that you won't be able to file for bankruptcy again until years later and those new debts will stick with you. If you still have a home it can be foreclosed on and your new car can still be repossessed for late payments. Treat your bankruptcy as an opportunity to get your financial house in order and to learn from your previous financial mistakes.

The Takeaway

Debt isn't something to be taken lightly. Treat it like you would treat a dog. When treated well, a dog can be your best friend. You can give commands to it and it will happily follow them. But, if you treat it poorly, it can become rabid and you can't get away from it fast enough!

You may also like...