How to Get Out of Debt: A Comprehensive Guide

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Debt is as American as apple pie. The country was founded with a national debt that amounted to almost 30% of GDP. At the end of 2011, the US debt-to-GDP ratio was almost 100%. Individual Americans have also increasingly embraced debt. For example, the average credit card debt is $5,700.

Pulling yourself out of debt is a straightforward process, though it’s hardly easy. It starts with spending less than you earn, which you can do by making and sticking to a budget. Next, prioritize your debt and make a strategy for how to approach each aspect of it. Then, find ways to stay on track and ensure success.

Step 1: Make a budget

One of the best ways to succeed in paying down debt is to make and stick to a budget. It’s essential to live within your means and reduce expenses to free up cash.

“When you do a budget, you see where your money has been going and where it is the easiest to cut costs,” advised Ashley Patrick, a financial coach and owner of Budgets Made Easy, who wiped out her $45,000 debt in 17 months. “If you do a zero-based budget, you will be able to see how much money you can send toward your debt.” With a zero-based budget, you give every dollar a job, even “leftover” money, so income minus expenses result in zero dollars.

Tips for bringing down costs and budgeting are fairly straightforward:

  • Write out your budget when you’re first starting out.
  • Look for easy costs to cut, such as dining out, travel and pricey clothes.
  • Brainstorm cheap or free things to do to lower entertainment costs.
  • Find ways to reduce fixed costs, such as switching providers for utilities, cable or phone.
  • After establishing a budget, use apps like Mint, YNAB and Everydollar to stay on track.

Step 2: Prioritizing debt

It can be hard to figure out where to start. Should you pay down the highest-interest debt first? The oldest first? Should you pay off debt first or start saving for the future?

There are several specific strategies for paying down debt, namely the debt snowball, debt avalanche, debt tsunami, debt snowflake and hybrid methods. The differences in these methods revolve around which type of debt you tackle first — the smallest (snowball), the highest-interest (avalanche), the most stressful (debt tsunami) or all debt simultaneously (snowflake). Hybrid approaches combine these methods in various ways.

The question of whether to pay off debt or save for the future depends on your individual situation and your relative interest rates.

“The generic answer is to save a small emergency fund to get you through paying off debt, then save your full three-to-six-month emergency fund,” said Patrick. “However, if you have something major coming up — pregnancy, moving, job loss — then you save everything until it passes, then pay on your debt.”

Step 3: Plan your debt payoff strategy

Once you’ve made a budget and thought about how you’d prefer to prioritize your debt, the next step is to think strategically about each of the elements of your entire debt picture.

Many people have more than one form of debt. Here are some tips on how to approach paying down or reducing each type.

Mortgage

Pay off your mortgage faster by setting up biweekly payments, which will provide an extra mortgage payment every year. Paying your mortgage this way will cut years off the life of the loan.

Another way to bring your mortgage costs down is to refinance, particularly if you have an adjustable rate mortgage. If interest rates have fallen and the cost of refinancing would be worthwhile, then it can reduce what you owe on your home. You may be able to work with your loan servicer to get a loan modification for your mortgage debt, such as a reduction in interest rate or an extension of the loan term.

Forbearance is another option to change the way you pay your mortgage. The loan servicer agrees to reduce or suspend your payments for a set period, after which you pay more over a number of months to bring the loan current.

Auto loans

You can bring down your auto loan by refinancing the rate or negotiating for a longer term. You can also pay the loan down faster by paying extra principal, like making biweekly instead of monthly payments, rounding up your payment or putting windfalls like bonuses and cash gifts toward the loan.

If you get in a position to pay your loan off early, make sure you don’t face any prepayment penalties in your contract.

Credit card debt

The best way to bring down your credit card debt is to pay off more than the minimum each month and to quit running up any more charges. You can make it easier to not use your credit cards by leaving them at home and deleting card information autosaved in online shopping sites.

You also may be able to get credit card companies to lower your rate, even temporarily. This is more likely to happen if you have a history of on-time payments, which you should mention when inquiring.

Another way to bring down the interest rates on your credit cards is to consolidate the debt. When you consolidate debt, you can pay off multiple balances with one loan or credit card, usually at a lower interest rate.

You can consolidate all your credit card debt onto a single balance transfer credit card. Many cards offer no-interest introductory periods of up to 21 months. Or, you can get a debt consolidation loan to pay off all your credit card debt, resulting in a single, more affordable monthly payment.

Additionally, paying your credit card bill before the statement due date each month has various benefits, such as lowering your interest payments and possibly boosting your credit score.

Medical debt

To manage medical debt, start by going over all bills with a fine-toothed comb to ensure there are no mistakes you’ll end up paying for. Keep good records to back up your discussions with creditors.

You may be able to negotiate some relief. Call the creditor to see about getting a discount if you pay in one lump sum. If that’s not an option, try to set up a payment plan that will prevent fees and interest from rising too rapidly while you pay over time. As a last resort, turn to a medical billing advocate or try crowdfunding to help pay your bills.

Tax debt

Tax debt is a different type of debt than others since it’s money you owe to the government. You should always prioritize tax debt; you may find yourself in legal trouble if you let it slide.

“This is one instance where you skip the debt snowball order and go straight for it,” said Patrick. “The IRS is one agency you do not want to owe money to.”

She speaks from experience — she once used a 0% interest credit card to pay off a $6,500 tax bill and then incorporated paying off that card into her debt snowball strategy. You can usually set up a payment plan with the IRS if you aren’t able to pay upfront, but be sure you can make those payments before you agree.

Student loans

There is a variety of student loan forgiveness programs that may be able to help you with your student debt. The Public Service Loan Forgiveness program (PSLF) is the most well-known, in part because it’s been in the news a lot lately with abysmal reactions about how few people it is actually serving.

Other options are income-based repayment plans that forgive your loan balance after a certain period of time. Some teachers, health care professionals, public-interest lawyers and members of the military may qualify for other forgiveness or adjustment programs.

Step 4: Set yourself up for success

Once you’ve got your debt payment process in place, make sure you stay on track by using all the tools at your disposal. You can enroll in autopay to make timely payments or use bill-tracking apps that will remind you when payments are due. Budgeting apps can be useful for keeping your spending in line.

Patrick recommended making visuals of your progress, joining like-minded Facebook groups to get advice and encouragement, listening to podcasts about debt reduction to gain insights and inspiration, and getting your spouse on board with the process.

But if you feel you need extra help meeting your debt-reduction goals, consider looking into credit counseling. A counselor can help you enroll in a debt management plan that will guide you as you pay back your unsecured personal debt.

The bottom line

Getting out of debt is hard but not impossible. There are many ways you can work to bring down what you owe, make paying it off easier and stay motivated to meet your goals. And if you do the heavy lifting of debt reduction, the benefits are profound — improved credit, reduced stress and financial strain, and more disposable income.

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