How to Pay Off Debt in a Year

Start With a Debt Repayment Plan

To pay off your debt in a year, you'll need to assess your financial situation.

Start by checking your credit report to confirm how much debt you owe. Your credit reports from the three major credit bureaus (Experian, TransUnion and Equifax) list out all debt accounts that your creditors have reported to them. Your balances may not be current since your report will contain an account's balance at the time it was last reported to the bureau, but it's a great place to get a bird's-eye overview of your debt. You can obtain a free annual credit report at AnnualCreditReport.com, or you can get your free Experian credit report at any time.

Make a list of all of your debts, including credit cards, personal loans, auto loans, student loans and mortgage. For each debt, take note of the name of the payment recipient, amount you owe, interest rate and minimum monthly payment.

Then start thinking about which debts you want to pay off first, and which ones you can realistically expect to pay off over a year. Typically, the most economical strategy is to prioritize paying down your highest-interest debt first, but another strategy may work better for you (we'll go over this in more detail later).

At the same time, think about whether you need to be saving money. If you don't have any cash set aside for unexpected expenses, create an emergency fund. Ideally, the fund should cover three to six months' worth of expenses in case of an emergency or loss of income. However, an emergency fund with just $1,000 is better than no fund at all. The money in your emergency fund should provide a cushion that prevents you from missing important payments or depending on a credit card or other high-interest debt to pay a surprise expense, such as replacing two flat tires on your car.

Create a Budget and Stick to It

Now that you know how much you owe, it's time to establish a budget. A budget gives you insight into your spending and can keep you on track toward paying off debt within a year. Here are five steps for setting up a budget.

1. Look at your monthly take-home income. If your income remains the same each month, you can find this figure by checking your most recent paychecks from the prior month. If your income changes from month to month, add up your income for the past three to six months and come up with the average monthly total.
2. Examine your expenses. Check your bank and credit card statements for the past three to six months to pin down how much you spend on a monthly basis.
3. Categorize your expenses. Put your expenses into categories. Categories could be broad, like recurring monthly expenses, or narrow, such as rent, utilities and insurance. You'll probably want to put discretionary (optional) expenses, like dining out and travel, into specific categories.
4. Establish financial goals. Since you're trying to whittle down your debt within a year, your priority should be to decide how much money you're willing to set aside each month to wipe out that debt.
5. Monitor your spending. To reach your financial goals, you'll want to track your spending. To accomplish this, you can use a budgeting app like Mint or You Need a Budget (YNAB). Or you might opt for an old-school method like a spreadsheet or good old pencil and paper. Set aside a certain time each week to review and categorize your spending.

Decide on a Debt Payoff Method

Once you've got a budget in place, consider which debt payoff method will work best for you. Two common methods are the debt avalanche method and the debt snowball method.

Earn Extra Income and Cut Down on Spending

One of the quickest ways to pay off debt is to bump up your income. Here are four ways to earn extra income to help put yourself on a faster track toward eliminating debt.

1. Hunt for a temporary job. You may be able to snag a side hustle as a tutor, data entry specialist, graphic designer, rideshare driver, delivery driver, housecleaner or handyman.
2. Take on freelance work. If you have a talent for writing, social media, programming or marketing, to name a few examples, think about taking on part-time freelance clients. The nice thing about freelance gigs is that you typically can work from home.
3. Become a sales whiz. Do you have unused clothes or electronics around the house? You can convert those items into cash through online platforms like Craigslist, eBay and Poshmark.
4. Rent out a room. If you've got a room to spare, you can turn it into a moneymaker by renting it out on a platform like Airbnb. Research published in March 2020 by online lender Earnest indicates an Airbnb host makes an average of $924 a month.

You might also cut spending and put that money toward paying your bills. Here are six strategies for doing this:

1. Kick the eating-out or ordering-in habit. Restaurant meals frequently cost more than meals you fix at home.
2. Stick to a shopping list. Building a grocery shopping list around a weekly meal plan, and being disciplined about following the list, can yield savings as it will prevent you from buying more than you actually need (or making those empty stomach impulse purchases).
3. Go generic. Buy generic or store-brand products, which tend to cost less than their brand-name counterparts and are oftentimes just as high quality.
4. Shop around for insurance. Obtaining at least three quotes for auto, homeowners or renters insurance coverage lets you compare prices and potentially save money on premiums.
5. Pare down your entertainment options. If you pay for cable TV along with streaming services like Netflix and Hulu, consider slimming down your monthly expenses by dumping cable TV and staying with streaming services, or vice versa.
6. Cancel subscriptions. Do you have a gym membership but haven't worked out there for months? Can you live without some of the paid app subscriptions that you've accumulated? Comb through your subscriptions and memberships, and see which ones you won't miss by axing them.

Consider Alternative Options for Paying Off Debt

Aside from adopting a debt-reduction strategy or slashing your spending, you may be able to lighten your debt load by embracing some alternatives. These include:

• Asking a credit card issuer to decrease your interest rate. Even a drop from 19% to 18% may help you pay off debt faster. If the credit card issuer declines your initial request, you might try again in three to six months (especially if your credit score has improved). It may take a little time and patience, but you could wind up with a lower interest rate on a credit card—and, therefore, could wind up paying less interest over time.
• Looking into a debt consolidation loan. A debt consolidation loan is designed to pay off higher-interest debt, typically credit card debt, through lower-interest lending. In August 2020, the average national interest rate for a 24-month personal loan, such as a debt consolidation loan, was 9.34%. By comparison, the average interest rate for a credit card that charges interest was 16.43%. One drawback of a debt consolidation loan: You typically need a FICO^® Score^☉ of at least 670 to qualify for a low interest rate.
• Exploring a balance transfer credit card. A low interest or 0% intro APR balance transfer card can help you pay off a higher-interest balance from another credit card. But to make this work, you must commit to paying off the transfer balance before the promotional interest period ends. Otherwise, interest charges will start kicking in. Also, you typically must have good or excellent credit to qualify for a balance transfer offer.