What is short-term debt? Effective strategies for paying it off fast

What is short-term debt?

Short-term debt refers to any financial obligations that must be repaid within a year. For businesses, this might mean cash flow management or addressing immediate expenses.  For individuals, this could involve covering emergencies, bridging financial gaps or using short-term borrowing for quick needs.

Some examples of short-term debt include:

• Accounts Payable: Bills owed to suppliers or service providers, typically due within 30-60 days.
• Short-Term Bank Loans: Loans taken out to meet immediate needs, with repayment periods under 12 months.
• Lines of Credit: Flexible short-term credit options, often used for cash flow or unexpected expenses.
• Overdrafts: Borrowing from a bank to cover expenses when your account balance drops below zero.
• Lease Payments: Equipment or property leases with payments due within a year.
• Taxes Due: Any local, state, federal or other types of taxes that may be due within the current year

While short-term debt can provide immediate relief, its high interest rates can take a big bite out of your wallet over time. That’s why addressing these obligations quickly is imperative to maintaining financial health. Check out Credit Karma’s Debt Repayment Calculator to better understand your own liabilities.

Short-term debt vs long-term debt

It’s important to distinguish between, the two types of debt–short-term debt and long-term debt:

• Short-Term Debt: Due within 12 months; includes credit cards, short-term loans and overdrafts alongside other types of short-term debt. This debt often has higher interest rates and require quick repayment.
• Long-Term Debt: Repaid over a period longer than a year, long-term debt includes financial obligations like mortgages, student loans and auto loans to name a few. Interest rates are typically lower and payments are spread over a longer timeline.

While long-term debt allows for structured repayment, short-term debt demands more immediate attention to avoid financial strain.

Why paying off short-term debt matters

As stated above, short-term debt’s higher interest rates in combination with the shorter repayment schedule can bring various financial risks. Short-term obligations, if not carefully manage, can:

• Accumulate high interest, increasing the overall cost of borrowing
• Limit your ability to invest in savings or long-term goals
• Add financial stress and strain your monthly budget

Paying off short-term debt quickly results in more money for savings, less stress and a clearer path to your financial goals.

Effective strategies to pay off short-term debt

Paying off short-term debt can feel overwhelming, but with a focused plan, you can make significant progress toward financial freedom. By revisiting your budget, increasing your income and choosing the right repayment strategy, you’ll set yourself up for success.

Here are practical and effective strategies to help you tackle your debt, minimize interest and regain control of your finances:

1. Rework Your Budget: The first step that should be taken when tackling your short-term debt is to revisit your budget and find areas where you can save. Even small savings add up over time, giving you extra money to allocate toward your short-term obligations. Check out our article on 5 Tips to Help You Track Your Spending for more budgeting tips.
2. Earn Extra Income: Boosting your income can be another powerful way to pay off debt faster, in turn putting you one step closer to financial freedom. Directing all additional income towards the repayment of short-term loans and any other debts can help drastically speed up the overall repayment timeline as well as save you money by reducing the overall interest.
3. Choose a Debt Repayment Strategy: There are two primary methods of eliminating debt effectively to consider when employing a debt repayment strategy:
4. The Debt Avalanche Method and the Debt Snowball Method:
   • Debt Avalanche Method: Prioritize paying off debts with the highest interest rates first. This minimizes the total interest you pay over time. For example, if you have credit card debt at 18% interest and a line of credit at 12%, tackle the credit card first. Gauge how much money the avalanche method could save you by using Undebt.it’s Avalanche Calculator.
   • Debt Snowball Method: Focus on debts with the smallest balances first for quick wins. This approach builds momentum and motivation as you eliminate smaller debts one by one.

5. Pay More than the Minimum: Minimum payments prolong repayment timelines and increase interest costs. Paying more than the minimum helps you reduce the principal balance faster and ultimately save money on interest. As illustrated in Experian’s article on 3 Reasons to Pay More than the Minimum on your Credit Card, paying twice the minimum payment can cut the overall timeline and total interest paid in more than half!

6. Use Financial Windfalls: A financial windfall is any sudden, unexpected and large sum of money received at one time. Typically, financial windfalls will come from sources like inheritance, lotteries, legal settlements, tax returns and any other similar areas. You should plan to apply any unexpected income or financial windfalls, directly to your short-term debt. As illustrated in the previous point, increasing your monthly payments can significantly increase your repayment timeline, simultaneously saving you money on interest paid.

7. Consider Debt Consolidation: Consolidating all short-term obligations into one loan, or credit card, with a lower interest rate can simplify debt repayment and reduce monthly costs. To gauge whether debt consolidation makes sense for you, refer to Investopedia’s article on Debt Consolidation.

For further reading on debt repayment strategies, check out our article on 7 Ways to Pay Down Credit Card Debt.

Preventing future short-term debt

Once you’ve tackled your short-term liabilities, it’s essential to maintain the momentum with strong financial habits to ensure stability and prevent any future short-term debt. Start by building an emergency fund that covers 3-6 months' worth of expenses. This safety net will help you handle unexpected costs, like medical bills or car repairs, without relying on borrowing.

Next, sticking to a budget is key. By monitoring your spending and prioritizing saving, you’ll gain a clearer picture of your financial habits and stay disciplined with your money. Similarly, using credit wisely is crucial—only borrow what you can realistically repay within the loan or credit card terms to avoid unnecessary debt.

Finally, regularly reviewing your financial goals will keep you on track. Life changes, and so do your financial priorities, so take time to reassess and adjust your plans to ensure you’re consistently working toward long-term financial health.

Learn how to start paying off your debt today

Paying off short-term debt may feel challenging, but with focus, discipline and a clear strategy, it can become an achievable task. Start by understanding your short-term borrowing, reworking your budget and exploring methods like the avalanche and snowball debt repayment strategies. Combine these efforts with some extra income, the effective use of financial windfalls and smart budgeting strategies to accelerate your progress. Once you’re debt-free, commit to building financial habits that will keep you secure and stress-free in the future.

Ready to take the first step to pay off debt? Get in touch with Associated Bank to start your journey today by creating a budget, choosing a repayment strategy and putting your plan into action. Financial freedom is closer than you think.