The Overlooked Key to Debt Payoff

Personal finance nerds debate endlessly about which tactics to use to pay off debt.

Should you prioritize building up your savings first— or keep your savings low while you throw as much as possible toward debt?

Should you focus on paying off your original loan— or switch loans to get a lower interest rate?

Should you refinance? Consolidate? Use a balance transfer?

There are good arguments to be made for many of these strategies. But sometimes we can become so focused on choosing the right tactic that we overlook the thing that matters most:

How fast are you actually paying off the debt?

Your Pace Matters

With investing, I often say, “Every bit helps.”

That’s because time works in your favor when you’re investing. The sooner you start, the more small amounts have time to grow and compound.

Debt is different.

If you want to pay off high-interest debt, your pace matters. A high interest rate means your debt is always trying to grow. The slower you pay it off, the harder it fights back.

Imagine you have $30,000 of debt at a 20% interest rate.

If you pay $1,000 a month, it would take 3 and a half years to pay off the debt.

If you pay $600 a month, you would be done in about 9 years.

​Now imagine you pay $508 a month. That would take 21 years.

​If you pay $500 a month, just $8 less, you would never be able to pay it off.

​You can use a free debt calculator to crunch your own numbers.​

I care less about whether you’ve found the perfect debt payoff tactic.

I care more about whether you're moving fast enough to make meaningful progress.

Paying More Than the Minimum Isn’t Always Progress

Some people have made debt payments for years, only to find that their balance is larger than when they started. After paying thousands of dollars over the years, they owe more than ever.

I've worked with clients who tell themselves they are “paying down” debt because they pay a little bit more than the minimum required. Then they wonder why they don’t see progress.

Moving fast enough is the only way to make real progress.

And there’s another important piece: you can’t call it debt payoff if you’re still adding to the debt.

Don’t tell yourself you’re trying to pay down a credit card balance if you’re still using the card to make purchases.

It’s like trying to empty a bathtub while the water is still running.

Don’t Confuse Moving Debt with Paying It Off

I worked with a couple who said they were proud of “paying off” all their credit cards. They congratulated themselves as if they had eliminated the debt.

But they hadn’t.

In order to get the credit card balances down to zero, they had taken out more debt on their home through a cash-out refinance.

From the perspective of the credit card company, the balance was zero. But from the perspective of their own money life, the debt had simply been re-characterized.

Purchasing a financial product is not the same as paying off debt.

Increasing one debt balance in order to decrease another is not the same as paying off debt.

I worked with another woman who said she had made progress because she had paid off her credit card. But she had gotten rid of that particular debt only by borrowing the same amount through a personal loan.

She hadn’t gotten rid of the debt so much as moved it around.

A new name doesn’t mean it’s gone.

Beware of the Balance Transfer Trap

Some people focus so much on finding new ways to move their debt around that they lose sight of the goal.

You want to kill your debt, not just shuffle it.

Cleaning your home means getting rid of clutter, not piling it up in the spare room.

That doesn’t mean moving debt is always a bad idea. Not all lenders and loans are created equal. It might make sense to swap one debt for another, particularly if you can meaningfully reduce the interest rate.

But don’t mistake the tactic for the goal.

Even balance transfers and 0% introductory rates can come with costs. The number zero might understandably lead you to think something is free, but a 0% interest rate doesn’t necessarily mean the debt comes at no cost. There may be an upfront fee or another financial tradeoff.

I learned this when we needed a new furnace. I was offered a 0% interest, 36-month payment plan. A free loan sounded too good to be true.

It was.

The payment plan didn’t charge interest per se, but the upfront payment option came with a $2,000 discount. In effect, choosing the 36-month plan would have cost us $2,000, even though it wasn’t characterized that way.

The lesson isn’t that you should never use a 0% offer or refinance a loan. The lesson is to look at the whole picture and keep your eyes on the actual goal.

Time Doesn’t Heal All Financial Wounds

They say time heals all wounds. I don’t think that’s true with debt.

It all depends on what happens over time.

How will you use your time? What choices will you make from one month to the next?

If you are aggressively paying down high-interest debt, time can work in your favor. Your balance gets smaller, the interest charges shrink, and eventually the debt disappears.

But if you are making small payments, adding new charges, or stuck in an endless loop of balance transfers, time might allow the burden to grow.

When you prune a tree properly, you allow it to grow stronger. The tree has the strength to thrive despite the pruning. If you want to kill a tree, you’ll have to get a saw and put in more work.

The city recently removed the street tree in front of our house!

Your debt is similar.

If you want it to be gone, you’ll need to exert some serious effort. If you just make little snips when it’s convenient, the debt will linger.

Your interest rate matters. Your loan terms matter. Your savings matter.

But your pace matters more than you might think.

Don’t let the search for the perfect debt-payoff strategy distract you from the strategy that matters most: pay off the debt aggressively enough that it actually goes away.