Debt Free In A Year? 10 Steps And Strategies For Paying Down Debt

Like many other Americans, you may be focusing on saving more money and becoming debt free. But eliminating debt doesn’t happen overnight, especially if you’re working on getting out of debt on a lower income. Making a debt reduction plan can help increase your chances of success, particularly if you set a timeline to reach your goal.

Start with 12 months. How much progress can you make in reducing your debt within the next year? Here are a few simple steps and strategies that you can use today to help reduce debt and, hopefully, become debt free.

1. Squeeze More Savings Out of Your Budget

Start by taking a close look at your monthly spending. Consider using a budget tracking app to understand where every dollar goes. Some of the best budgeting apps are free or charge a low monthly fee after a free trial period. Use these apps to look for opportunities to cut spending and dedicate more money to eliminating debt.

Even small cuts to spending can add up fast. For example, if you can find $200 of spending that you can cut from your typical monthly budget, after 12 months you would have $2,400 to put toward your debts.

2. Automate Your Debt Payments

Savvy savers automate their savings. If you want to be free from debt, try using these tools and techniques to put your debt payments on auto-pilot:

• Use automatic transfers from your bank account to your credit card.
• Use a calendar or automated reminders to keep track of payment due dates, especially if you’re paying off multiple credit cards or debts at once.
• Use a debt management app, budgeting app or your bank or credit union’s built-in online tools to track your progress with paying off debt.

3. Adopt a Debt Payoff Strategy

Two strategies for paying off debt are the debt snowball and the debt avalanche methods. Here’s what those methods look like:

• Debt snowball. With this method, you start by paying off your smallest debt first while still making the minimum payments on your other debts. Then, you move on to the next-smallest debt. This will give you a sense of momentum that builds over time, like a “snowball” rolling downhill.
• Debt avalanche. With this method, you start by paying off the highest-interest debt first while making minimum payments on all other debts. Then, you start paying off the next highest-interest debt. You may pay less interest over time by knocking out the higher interest rate debts first.

While the debt avalanche strategy can help you save money on interest, you may prefer the feeling of accomplishment you get from the debt snowball method when you pay off smaller debts first. Whichever way works for you, the important thing is the result: becoming debt free.

4. Apply for a Balance Transfer Credit Card

If you have a good credit score and carry one or more credit card balances with high APRs, you may want to consider applying for a balance transfer credit card. Some balance transfer credit cards offer 0% APR on the balance transfer amount for an introductory period of a certain number of months. This lets you open a new credit card account at a lower introductory rate of interest.

A balance transfer credit card does not eliminate your debt, but it does allow you to pay off your debt at a much lower, or 0%, interest rate for a set period. Cutting your APR can help you pay off debt faster. However, be sure to read the fine print. Be aware of any balance transfer fees, and make sure you pay off your balance before the end of the introductory rate period.

5. Consider a Debt Consolidation Loan

You might be able to get a better deal on paying off your credit card debt or other debts by combining those debts into one new loan. This is called a debt consolidation loan. To get a consolidation loan, you’ll generally need fair credit or better.

Similar to a balance transfer card, the best debt consolidation loans offer a lower APR on your debt, helping you save money on interest and pay off debt faster. Both with a balance transfer card and a personal loan, the challenge is not to incur additional debt while you’re paying off the card or consolidation loan.

6. Pay Off Debt With a Cash-out Mortgage Refinance

If you own your home, have a sufficient amount of equity in your home and qualify to refinance your mortgage at a lower interest rate, you may want to consider a cash-out refinance. This lets you refinance your mortgage in a way that unlocks some cash from your home equity, allowing you to put that money toward other goals—like paying off high-interest debt.

Think of a cash-out refinance as a debt consolidation loan that you give yourself. Let’s say, for example, that you have $20,000 in credit card debt with an APR of 20%. You may be able to get a cash-out refinance and pay off your credit card debt. This could be a good financial move to help save money on interest and get out of debt faster. Remember, though, that your home is the collateral for this loan.

7. Make Extra Money With a Side Hustle

Earning extra income, naturally, can help you pay off your debt faster. Think about devoting some spare time each week to earn extra income. This, of course, depends on your career situation, your skill set and how much free time you have outside of work. But whether you pick up extra hours at work, take a part-time job or start a lucrative side hustle, there are many options to make extra money.

For example, if you could earn an extra $500 per month, in 12 months, you’d be able to pay off an additional $6,000 of debt.

8. Get Consumer Credit Counseling

If you are struggling to pay your bills and are falling behind on your debts, consider talking to a consumer credit counseling service. These agencies, which are often nonprofit organizations, can help you take a closer look at your budget and spending and create a debt management plan to help you pay off debt faster. These agencies can also work directly with your lenders to potentially help you save money on interest and fees.

If you’re feeling overwhelmed by debt and do not want to declare bankruptcy, consumer credit counseling services can help you get back on the right track.

9. Ask to Renegotiate Debts

If you have fallen behind on your debt payments, one option is to seek debt relief by asking your creditors to renegotiate your debts and accept a smaller payoff than the amount you owe. This is known as debt settlement. You can attempt debt settlement negotiations by yourself or you can hire a debt settlement company. Debt settlement companies work with your creditors for you in exchange for a fee, typically a percentage of the amount of settled debt.

Debt settlement can be risky and costly. As such, it’s typically considered an option of last resort. There’s no guarantee that a creditor will agree to accept a lower payment than the amount you owe. And the process of becoming delinquent on your debts can do severe damage to your credit score.

10. Discharge Your Debts by Declaring Bankruptcy

When debts have become overwhelming and you don’t see a reasonable path forward, declaring bankruptcy may be an option. Bankruptcy can help you wipe out your debts, creating a fresh start so you can rebuild your finances.

However, keep in mind that bankruptcy will cause severe damage to your credit score. Also, not all debts can be discharged in bankruptcy—it depends on your overall financial situation and whether you declare Chapter 7 or Chapter 13 bankruptcy. You also might have to agree to a court-ordered repayment plan for some of your debts.

Bottom Line

Creating a plan to eliminate debt can provide a debt payoff timeline and help you cut your current monthly spending. It can also help you decide which methods can help you save money on interest and make the most progress to pay off debt faster. If your debts have become too stressful and you’re feeling stuck, you may want to consider some form of debt relief to get some extra help with your bills.