How To Get Out Of Debt

Published: 12/26/2021
Updated: 12/26/2021

How To Get Out Of Debt

Estimated read time: 4 minutes

Finding yourself deep in debt can be overwhelming. The good news is, getting out of debt is possible—it just takes a little time. While some debt can be unavoidable—such as a mortgage or car loan—you can and should deal with other unnecessary debt that's causing stress. Once you formulate a plan and stick to it, you could find yourself debt-free and armed with the knowledge to stay that way. Follow these steps to help you get out of debt, remain debt-free in the future and build good credit for the long haul.

There are a few things you can do to help you get out of debt, remain debt-free in the future, and build good credit for the long haul.

Identify Exactly What You Owe

Take the first step to keep yourself from drowning in debt even further. Make a list of all your debts and include your mortgage, vehicle loans, student loans, other types of loans, accounts in collection and credit cards. Include your interest rates and monthly payments for each type of debt as well. Add up the payments for each month and that will be your minimum amount you must have available each month.

If you are unsure of all your debts, especially those that might have already been sent to collections, you can check your free credit report. This will show what is being reported to the credit bureaus and all of your current balances.

The amount you come up with is the minimum amount you need to pay every month to stay current, but that's not enough to solve the problem. If you only pay that amount each month, it is very unlikely that you will be able to pay off all of your debt.

Determine What You Can Afford to Pay Each Month

You'll be able to stay on top of your debt once you've listed out everything you currently owe to creditors. In addition, make another list that includes all your regular monthly expenses (rent, utilities, groceries, etc.) This will help you get a clear picture of future budgeting needs.

Some of these expenses may vary from month to month, so it's a good idea to take the average of several months to get a solid estimate of your average monthly expenses. For example, if your electric bill is much higher in the summer, simply calculate the average. To find out your average monthly cost for electricity, add up the total of six months' worth of bills (including non-summer months) then divide the sum by six. This is your average monthly electricity payment for the past six months.

This is a list of basic expenses that you have to pay every month. Now compare this amount with your monthly take-home pay or monthly net income. This shows how much debt you can afford to finance. Stay below this limit if your debt increases. Also consider reducing your lifestyle or increasing your income.

If you decide to pay extra on your debt and the money left over after paying basic expenses is more than the minimum amount you need to put towards your debt, set the percentage of that extra towards paying your debt each month. Remember, the more above the minimum, the faster you'll be able to pay off your debt.

Reduce Interest Rates

Your debt can grow really rapidly, especially if you have a lot of credit card debt with high interest rates. If you're paying tons of interest each month, it can be very difficult to pay off the principal.

Here are some tips for how to reduce interest rates on common types of higher interest debt:

Credit Cards. Call your credit card issuer and ask for a lower interest rate. If you have good credit and a strong payment history with them, they may agree to lower your rate for a period of time, or even permanently.

Student Loans. Depending on your unique situation, you may qualify for an income-driven repayment plan on that might be able to lower your payment. You must be in good standing on your student loans to qualify. This option could reduce your payments without impacting your credit score.

Debt Resolution & Debt Relief. If you’re looking to deal with high interest rates and difficult-to-manage debt, then you might consider debt resolution. Debt Resolution and Debt Relief companies will negotiate with creditors on your behalf to get your payments reduced. While this may make it easier for you to pay off your debt, it commonly will have a negative impact on your credit score for a period of time. Anytime you pay less than the full amount you owe, it shows up on your credit report as negative information. Negative information can contribute to lower credit scores.

Every situation is different, so don't overlook options like also visiting a local non-profit credit counselor. Credit counseling organizations can help you better understand tactics for managing and reducing your debt.

Pay Your Bills On Time!

Pay all your bills on time - it’s one of the single best things you can do for your credit! And never miss a payment! You can set up automatic payments or payment reminders through your bank to help you stay on track.

If you find that you're struggling to keep up with payments, a debt consolidation loan or a debt resolution plan could help. But you don't always need professional help to create your own plan for managing debt.

Practice Good Discipline

It's important not to take on new debt as you work to pay down your current debts. Avoid the temptation to use a personal loan or balance transfer card to consolidate credit card debt unless you're extremely diligent about not using the card once you've paid off the balance.

Managing your debt doesn’t have to be complicated. Each time you successfully pay off a debt, put the extra money you freed up toward paying off more of your other debts. In months where you anything extra money, put it toward additional payments on your debt vs. going to a local rock show.

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