How To Get Out of Debt: A Step-by-Step Guide
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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If you’re heavily in debt, you’re not alone: a GOBankingRates survey found that the average American is $63,000 in debt. Whether your debt is from student loans, credit cards, mortgage loans, auto loans, medical bills or some other form of debt, it might seem impossible to dig yourself out of it. But if you make a plan to tackle your debt head on, you can ease your way out of your current financial predicament.
Before you begin the process of becoming debt free, it’s important to know exactly what you’re dealing with. Gather all of your credit and debt information, including:
- Your most recent statements from any outstanding loans and debts, including student loans, medical bills, etc.
- Your credit card statements
- Your credit report, which you can obtain for free each year through AnnualCreditReport.com
- Your credit score, so you can find out if you’re eligible for a debt consolidation loan or lower interest rates
Once you’ve gathered all the pertinent information, follow this step-by-step guide for paying off debt.
Find Out How Much Debt You Have
Having a clear view of how much you owe and to whom will help you to tackle your debt, and could even make it seem more manageable. Compile a list of all your debts that includes the following:
- The name of each creditor
- How much you owe
- The interest rate on the debt
- The minimum monthly payment
Your credit card statements also show how much you’ll need to pay each month to pay off all your debt within three years. Include this number on your list as well.
Lower Your Interest Rates, If Possible
With high interest rates, your debt will continue to rise more quickly, making it harder to pay off. One way to lower your interest rate is to make a balance transfer to a credit card with another bank. Some credit cards have 0% APR for 18 months, so you can use this time period to pay off your balances without your debt rising every month. However, it’s important to note that there is sometimes a 3% to 5% fee for balance transfers.
Another way to lower your interest rate is to call your credit card company or lender directly and ask for an interest-rate reduction. If you are a long-time customer, they might lower your rates as a way to thank you for your loyalty.
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Finally, you could use a debt consolidation loan to combine all of your credit card payments into one single payment with a lower interest rate. However, keep in mind that a longer loan term means you’ll be paying interest over a longer amount of time, which could end up costing you more. Do the math to make sure consolidating is worth it before you commit.
Calculate Your Monthly Payments
Go back to your list. Add up the three-year payoff amount for each of your credit cards, plus the monthly payments for all of your other debts. This is the total monthly payment you should aim to make each month.
Come Up With an Action Plan
Once you know your total monthly payment, determine whether this is something you can realistically pay each month. If making this monthly payment is not feasible, meet with a bankruptcy attorney or credit counseling agency to figure out your next steps.
If you can make your monthly payments, or you can find room in your budget by cutting unnecessary expenses, follow these steps next:
- Choose which debt to pay off first. In most cases, you should focus on paying off credit card debt because credit card interest rates are usually higher than interest rates on student loans, auto loans and mortgages. Make your credit card debt, or whichever debt has the highest interest rate, your top priority debt.
- Consider setting up an automatic payment for minimum balances on all other debt.
- Try to pay off as much priority debt as you can each month.
- Once your priority debt is paid off, choose another debt to focus on and follow the same steps until you have paid off all debts.
Track Your Progress
If you have multiple sources of debt to pay off, it’s important to monitor your repayment progress every month to make sure you’re tracking toward your goals. Once one debt is paid off, shift your focus to your next priority debt until everything is paid in full. As you move through the repayment process you should:
- Keep an eye on your credit score to see if it’s improving. Your credit score is a good indicator of your financial fitness.
- Consider doing a balance transfer or a credit consolidation if you haven’t already.
If you follow the action plan, you will work your way to being debt free. If you decided you need additional funds to pay off your debt, consider working more hours at work, ask for a raise, get a second job or take the occasional side gig to earn some extra money to go towards debt payments.
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