12/23/2015
How to Pay off Debt Fast: The Most Efficient Method
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How to Pay off Debt Fast: The Most Efficient Method
On May 2nd, 2013, posted in: Managing Credit and Debt by Thomas Bright | 24 Comments
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Last week, we talked about how to pay off debt using the
debt snowball—a strategy that allows you to pay off small
Managing Credit and Debt
Student Loans
accounts quickly while maintaining a psychological edge
over your debt. While the snowball method is a great one,
it’s actually not the most efficient method and won’t help
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you pay off debt fast like the debt ladder will. In the second
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installment of our “How to Pay off Debt on Your Own
Series,” we are going to teach you how to pay off debt fast,
in a way that has mathematical advantages. Just keep in
mind that “fast” here is a relative term. You won’t close out
individual accounts at lightning speed, but this method will
help you become totally debt free in the fastest way
possible. Ok, think of debt as the top of a ladder—you know
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that tall, intimidating unstable piece of metal you use to do
dangerous things like clean gutters and cut trees. See the
connection? We want to come down from that ladder and
re-establish some firm financial footing. Not only that, but
we want to pay off our debt fast, in the quickest and most
efficient way possible, so that we don’t waste any money on
extra unnecessary interest. This one is for you, math nerds. Let’s take a closer look.
How to Pay off Debt Fast: Step by Step
Step 1: List each of your debts in order from largest to smallest interest rate.
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12/23/2015
How to Pay off Debt Fast: The Most Efficient Method
Step 2: Set aside the funds to make each minimum monthly payment. Then, put any extra funds toward the
account with the highest interest rate. In our monthly budget, we have $500 to pay off debt each month, and
the total of our minimum payments is $230 (leaving us a $270 surplus):
After the first month, we have almost closed the Macy’s account. While we have still been paying interest on
other debts, we are doing so at a lower percentage than the Macy’s account, saving us money in the long-term.
As you can see, next month we will pay off the Macy’s account in full. Once we account for interest, we will
spend $66.23 on Macy’s and will have a $223.77 surplus to put toward the next account—our private student
loan. Our private student loan will go from a balance of $809.21 to a $767.98 after interest and our minimum
payment. But, since we closed the Macy’s account, we still have a surplus of $223.77, and our student loan will
drop to $544.21!
Why the debt ladder method works
Basically, the principal (the amount before interest) of your debt is not as important as the interest rate,
because the interest rate determines how quickly your debt will grow and how much more you will have to pay
each month. By following the ladder method, you minimize the amount of interest paid. This means that you
pay less overall.
The Fastest Way Isn’t for Everyone
When we talked about how to pay off debt with the snowball method, we kept reiterating the psychological
boost. That’s what the debt snowball is all about. The debt ladder method is much different. Even though this
method allows you to pay off debt fast (keep in mind, this is total debt), it might take you a while to actually
close an individual account in full. In our example, we did it quickly, but this won’t always be the case. Let’s be
honest, closing an account in full is extremely rewarding for consumers who are figuring out how to pay off
debt. Each time you close an account, you’ve reached a milestone. Just know that with the ladder method, this
might not happen as quickly.
If you expect quick results and get frustrated easily, the ladder method may not be for you. You don’t want to
get discouraged and give up, leading to more debt down the road. Instead, go for the debt snowball. If you are
good with long-term planning and can accept delayed satisfaction, make sure you understand how to pay off
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How to Pay off Debt Fast: The Most Efficient Method
good with long-term planning and can accept delayed satisfaction, make sure you understand how to pay off
debt with the ladder method—it’s probably a good option for you. It certainly is the “best” way if you can be
patient; and remember, this is the fastest way overall, it just might feel slow in the short-term.
Deciding how to pay off debt based on the type of debt
You might be thinking; “Does the ladder method work better for certain types of accounts?”
The answer is yes and no. The ladder method will always be more efficient than the snowball method and will
allow you to pay off debt fast. But with that said, the debt snowball works well for small accounts, like retail
credit cards (think Macy’s, Old Navy, etc.) The ladder method is probably easier for larger accounts, like student
loans, which are going to take a while to pay off anyways.
Remember, ClearPoint wants you to know how to pay off debt on your own if at all possible. And, of course, we
want you to pay off debt fast so you can start planning for other financial goals. But, if you have a high debt-toincome ratio, through, you might need some extra help. Figure out your debt-to-income ratio, and if it’s over
15% get started with a free budget review and credit counseling session. We hope you now know more about
how to pay off debt—thanks for reading!
Which method do you prefer: the debt snowball or the debt ladder method?
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24 Responses to “How to Pay off Debt Fast: The Most Efficient Method”
David Florian says:
August 11, 2013 at 5:31 pm
I am looking to pay off my debt as fast as possible but I am not sure where to start.
Thomas Bright says:
August 12, 2013 at 7:30 pm
Hi David,
Knowing where to start can be challenging. I encourage you to do this:
Create a debt payoff table for all that you owe:
Debt payoff table
Then, Calculate your debt-to-income ratio:
Debt to income ratio calculator
If this is under 15%, you can probably use the snowball method or ladder method to pay
off your debt.
If not, and if high interest rates are part of the problem, you might benefit from a debt
management program:
Debt management program
Let us know if you have any other questions; we are here to help!
Jacinta Isabel Herrera says:
September 17, 2013 at 3:37 am
http://www.clearpointcreditcounselingsolutions.org/how­to­pay­off­debt­efficiently­the­ladder­method/
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