How to Pay off Debt Fast: The Most Efficient Method

Being in debt has a lot in common with being on the top of a ladder—you know that tall, intimidating and 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. That’s exactly what we’re going to cover in this post. One quick disclaimer, though: this method won’t work for people who are struggling to make monthly payments. If your debt is overwhelming, try our free credit counseling service instead.

Before we go any further, let’s cover one distinction. We’ve talked before about how to pay off debt using the debt snowball, a strategy that allows you to pay off small accounts quickly while maintaining a psychological edge over your debt. While the snowball method works for many people, it’s actually not the most efficient. It prioritizes psychology over math. But in the “ladder method” the tables are turned. This one is for the math nerds, and people who want to pay off their debt fast, even if they may not feel like they are making quick progress. 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. 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.

Account Name Amount Interest Rate Min. Monthly Payment
Macy’s Card $350 18% $20
Private Student Loan $850 13% $50
Car Payment $1,000 7% $85
Stafford Student Loan $675 5% $40
Stafford Student Loan $500 4.5% $35

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):

Account Name Amount Interest Rate Min. Monthly Payment
Macy’s Card $65.25 18% $20
Private Student Loan $809.21 13% $50
Car Payment $920.83 7% $85
Stafford Student Loan $637.81 5% $40
Stafford Student Loan $466.88 5% $35

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 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-to-income ratio, 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!

Thomas Bright is a longstanding Clearpoint blogger and student loan repayment aficionado who hopes that his writing can simplify complex subjects. When he’s not writing, you’ll find him hiking, running or reading philosophy. You can follow him on Twitter.

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30 responses to “How to Pay off Debt Fast: The Most Efficient Method”

  • Hi!! I have a question…
    We’re saving up to buy a house. At the same time, we’re working on paying off credit card debt-we have 3 credit cards, with balances of $667, $1136, and $408. The card with the balance of $408 has an interest rate of 19.99, while the $667 one is interest deferred until September. Which should I work on paying off first? Once we go past September the interest rate for $667 goes up to 23.99.
    Also, I have $1200 saved for a house right now. Should I apply that to the credit card bills, and just get rid of most of the bills, then start over with saving for a house?
    *we are planning to go buy a house in Spring 2017.
    Thank you!!

    • Thomas Bright

      Hi Kayla,

      So I tend to take a conservative approach to these types of questions and I’m always on guard against the worst case scenario. The interest rates on your CC debt are pretty high, much higher than a mortgage would be, and I think it’s likely in your best interest to pay those off (leave a little set aside as an emergency fund if you can)…and then start saving up for your house. You might pay the high interest accounts first and then, if you can, pay off the defrred account before September. That will likely be more efficient, so you aren’t draining money to interest each month. Best of luck.

  • Letitia

    I have a 30% interest loan.I stupidly borrowed to pay a debt. I ended up paying the debt out of my other bill money. Sick about this but how do I pay off a loan with that much interest?

    • Thomas Bright

      Your best bet is simply to stay aggressive when paying it and go above and beyond the minimum payment each month. If your credit is good enough to refinance it or transfer it to a lower rate, that may be a good option too, but it can pose problems if you don’t pay it off in time.

  • I love the ladder system works best for me. Paid off two cards in a month.

    • Thomas Bright

      Awesome! It’s definitely a great method, especially if you want to minimize interest. Keep up the good work, and thanks for sharing.

  • Hi,

    I have multiple student loans totaling ~$70,000. I intend to use this method (as well as bi-monthly payments) to pay them down. We also just got a $3,000 loan (financing) that has %0.0 interest for 12 months, after which the rate increases to %29.9. The minimum monthly payment on that financing is $30, whereas our “self instituted” minimum payment ($3,000 divided by 12 months) is ~$245 per month.

    My question is this: Should we work on paying off that %0.0 interest loan first so that we get that $245 per month payment quicker to apply towards other loans, should we make only the minimum $245 payment towards the $3,000 loan since it will get paid off in a year (well before all the other loans), or should we change our minimum payment for that loan to the financing-specified $30 and treat it like %0 interest loan until the percentage increases and then change it to a %29.9 interest loan after 12 months (basically moving it from the bottom of the ladder to the top once the rate increases)?

    In my mind, this loan is an outlier since I am viewing it as a loan with a 1-year lifetime.

    For example, some student loan monthly payments are $11, $29, $40, $53, $60 and a mix of interest rates either %6.8, or %8.5. These loans all have 8 years left.
    The $3,000 loan has an interest rate of %0 and a monthly payment of $245 (assuming a 1-year lifetime), but should be paid off last according to the Ladder.
    By using the Ladder method, I need to pay off $14,351 in order to gain $193 per month towards other loans. Conversely, if I paid off the $3,000 loan first (greatest monthly payment-to-loan lifetime ratio), I would only need to pay off $3,000 to gain $245 per month to add to other payments.
    It would take 2 months to gain $245/month, as opposed to 4 months to gain $193/month.

    Should monthly payment-to-loan lifetime ratio be considered?

    • Thomas Bright

      Hey Cliff,

      This is a very interesting scenario and you’ve raised some good points and questions. If I were you, I would be very concerned about the $3,000 loan. I would probably want to pay that off as soon as possible. Sure, you may lose a hint of efficiency in the process, but you’ll be saving against A LOT of risk. You absolutely do not want that to go up to 29% if you can help it–it’s not going to have safety nets like your student loans (if they are federal) and you never know what might come up unexpectedly. Once that’s out of the way, you could return to the student loans as normal, using the ladder method.

      The point about monthly payments to loan lifetime is an interesting one. It won’t change the strategy, though, believe it or not. Leaving the $3,000 loan aside for now… as a general rule (like if the 3K loan were a student loan, for example) you will still want to pay toward the highest interest account first. Otherwise, by working to “free up” money on a loan with a lower rate, you (at the same time) wouldn’t be putting that available money to the higher rate, which is why it doesn’t help you in the long-term. It’s an issue of opportunity cost (ie what are you sacrificing when you direct those funds away from the high interest account?). The answer is that you are sacrificing the ability to put money toward your high interest debt now in order to do it later, which doesn’t help your cause. The tough thing is that you’d want the lowest monthly payment possible on the lower interest rate loans. In a perfect world, we’d be able to adjust those according to maximize efficiency, but unfortunately I don’t think many lenders will negotiate that point.

  • Lynette

    Hi there,
    Thanks for all this information. I have four student loans and a new car loan. My student loans total 51000, car loan another 18000. I have one student loan at 28000 with an interest rate of 6.8. I was told consolidating the four student loans will not help me out much. I just signed up for auto debit and I can afford to pay a bit over the minimum payment each month. My question is this: I have two student loans at 6.8 but one is substantially lower – 8773. Would it be better to pay off the smaller debt at the same high interest rate first or work on the larger debt?
    I am really depressed about all the interest i will end up paying.

    • Thomas Bright

      Great question, and I’m totally with you on that: interest is a huge pain!

      For the student loans with the same rate, experts agree that paying the smaller loan off first will be best. No matter how you proceed, it actually works out to cost the same overall, but getting rid of the small loan early can provide a credit boost and of course give you more money back (not having that monthly payment) to put toward the other loan next.

      This all assumes that 6.8 is the highest interest rate you have, though. If you have another loan with, say 7.5 percent, you will want to pay that one first instead (to achieve efficiency).

      We have a great article on all things related to student loan interest and you may find it interesting: http://www.clearpoint.org/blog/best-way-to-pay-off-student-loans/

      Best of luck with your car payments and student loans!

  • Hello,

    I wonder if it’s more beneficial to pay off my student loans in order of highest interest rate or by the amount of interest that accrues on it daily. For example, I have a student loan with a 6.8% interest rate that has a balance of about $8500 that accrues interest at a daily rate of about $1.50. I also have a 6.21% interest rate loan of 18,500 that accrues interest at a daily rate of about $3.14. Although the former loan has a higher rate, it would seem better to tackle the loan that generating more interest. What are your thoughts?

    • Thomas Bright

      Hi Char,
      I struggled with this at first too, because the right answer feels so wrong! But believe it or not, you save more money by paying off the higher rate. Even though it’s growing less per day, it’s growing at a higher percentage in relation to its principal. This means that it’s making your overall repayment more expensive at a faster rate than any loan with a lower interest rate.

      Think about it this way. If a small pond had 10 fish but a 50% growth rate each year, then the first year it would only grow by 5 fish. But after 10 years there would be 576 fish! Now what if there was a bigger pond with 50 fish, but it only grew at a rate of 25%? After the first year, it would add 12.5 fish, but after 10 years, there would be 466 total fish. The bigger pond produced more fish in the first year, but the small pond grew faster.

      Maybe this isn’t a biologically feasible example, but I hope it demonstrates the following: just because something is growing less (in total number), doesn’t mean it isn’t growing faster and won’t produce the most growth long-term. In the case of your loans, that higher interest rate is going to produce more debt and more quickly in the long-term.

      Best of luck!

  • Is it better to pay a lump sum of money at the end of the month or to make two payments within the month? Ex: pay $3000 on the payment due date or $1500 on the 1st and 15th

    • Thomas Bright

      Great question. The answer depends on the type of debt. Credit cards don’t accrue interest until the balance rolls over into the next month–so it won’t really matter. Student loans on the other hand, accrue interest every single day, so it is beneficial to pay on the 1st and the 15th.

      One other note about credit cards: your credit card company might report your balance to the credit bureaus earlier in the month than the final due date. This means that even though you don’t allow a balance to roll over and gain interest, the credit bureaus see that you do have outstanding debt. By splitting the credit card payment up each month (1st and 15th, for example) you can help limit this issue, although it’s typically not a big concern unless you are really pursuing a strong credit score for an upcoming credit application.

  • Joshua

    Thank you so much for the article. I had a quick question about this payment method. I am currently trying to pay off my wife’s school loans. She has three loans around $3000 at 7.9% interest and on massive loan of $50,000 at 6.8% interest. Would it still be best to pay off the three smaller loans at the higher interest rate with the extra money I can pay towards her loans?

    • Thomas Bright

      Great question. If you are interested in efficiency and saving the most money, then it makes sense to pay the accounts with the higher interest rates first. Your case is different than most who ask this question. Many times, the smaller accounts have the lower interest rate, so people really want to go ahead and knock out the smaller accounts. This isn’t as efficient but it can provide a credit boost. Since yours are small and have high interest, you get a double whammy of sorts by being able to be efficient and potentially get a lift in credit score once those are paid off and you begin to tackle the bigger loan. We took a really detailed look into how this applies to student loans in this post, which i recommend reading if you get a chance:
      The Best Way to Pay off Student Loans

  • Is this really the most efficient though? In the example, the gross monthly interest for both the Car and the private loan are both higher than what you’ll pay for Macy’s interest. The most advantageous way to do this would be to pay off the one with the highest interest accrued per month, not the rate.

    • Thomas Bright

      Hi Zak,

      That’s a fair question, and it took me awhile to wrap my head around the math too. Yes, the car and private loan have more total interest, but they aren’t growing at a quicker rate. It might not seem like it, but if we compared paying those loans first and then the Macy’s account vs. paying Macy’s first and then the loans, paying Macy’s first would save us the most money.

      If you’d like to see the math in more detail, check out this post where we did some similar examples with student loans.

  • Chet DeVries

    My wife has some student loans that we thought we had been paying on, but it turns out we weren’t. For some reason the loans had been deferred for the past three years without either one of us requesting it to happen. Also the Dept of Education has her graduation date wrong (listed as 2013, but graduated in 2011). Is there a way to fight this since somewhere someone made a mistake? We know we will have to repay the loans, but if there is a way we could at least get the interest taken off since someone messed up somewhere. The most recent deferral request was from April of this year and neither my wife or I have made any contact to the school she attended or the Dept of Education since she graduated in 2011.

    Thank you for any help or direction you can offer us.

    • Thomas Bright

      That’s an odd situation Chet. If you didn’t make that request, then I would call the lender first to see what is going on/ Maybe they did that as a courtesy since they had not gotten payment from you? That’s one possibility. If you can show that interest accrued when it shouldn’t have or that you weren’t adequately notified about the status of your loan, then you might have a case to make with the lender. Good luck!

  • Brooke

    My husband has $7000 in medical debt in 12 different accounts. How do I begin this process? This is keeping us from a home loan.

    • Thomas Bright

      Organize those accounts by interest rate and monthly payment and just begin chipping away. We also have an article about negotiating medical expenses, so you might not have to pay full price on all of these.

  • Marina Torres

    Hi Thomas,
    Thank you for the great article.
    I have a question
    I would like to pay my student loans weekly (online) Sallie Mae/Great Lakes and NELNET
    The total is $130,000
    I would like to pay over the mimum payment required
    For example, Sallie Mae account has a minimum payment of $528
    I plan to pay $150 weekly (I am figuring this method improves the biweekly method)
    My question is this:
    Will I benefit paying weekly ? or is there a drawback I am missing
    These student loans are from our children’s education and my husband and I are working hard to pay them off
    Thank you for your help
    Marina

    • Thomas Bright

      Marina,

      That sounds like a good plan to me. Interest on student loans accrues daily. So, you WILL be doing even better than the bi-weekly method if you can pay every week.

      Good luck!

  • I have a debt (from 04′ and released in 09)’ with a dentist that I have not been able to pay due to serious health issue (now totally disabled). Now in 2014′ I am in need of dental work (before major surgery) and would really love to go back to the same dentist. My question is, if its been this long and was released in 2009′, I don’t understand why the dentist office (billing lady) said that I need to contact collection agency and make a settlement. I would rather just pay the dentist office directly, but was told that since they hired out to a collection they cant receive payment. My confusion lies with the fact that their hired agency never contacted me for payment and it has been over 4 years, Cant I just pay the dentist a settlement or even entire????… BTW I really love this dentist and only want him to fix me up. Is it wrong for the dentist to take payment directly from me???
    In Sincere Need of Advice,
    Suzie

    • Thomas Bright

      Hi Suzie,
      When you say “released” I assume that is when the dentist gave up attempting to collect and then sold the debt to a third-party. In other words, it sounds like they didn’t “hire” a collection agency but instead “sold” your debt to them. I could be wrong, but either way it sounds like there is some sort of contractual arrangement between them and the collector that prevents them from dealing with you until this is paid. I’m not sure why they haven’t tried to contact you, and that does seem very odd. If you’re in a position to repay the debt, I would strongly encourage you to get this all in writing from your dentist first and document your correspondence with the collectors as well.

  • Jacinta Isabel Herrera

    Please unblock the account:

    I am trying to access the account to update the table.
    Username: chabelaher@outlook.com
    818 359 2942

    • Thomas Bright

      Hi Jacinta,

      I’m not sure exactly what the problem is. I’m going to send you an email so that we can figure out what’s going on and I can help you.

      Thanks!
      Thomas

  • David Florian

    I am looking to pay off my debt as fast as possible but I am not sure where to start.

    • Thomas Bright

      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!

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