Ways to get out of debt
Getting out of debt isn’t easy. Sometimes it takes all you have to keep up with monthly bills and save for a rainy day, let alone pay the minimum monthly payments on your credit card. Fortunately, there are plenty of ways to get out of debt that won’t make you miserable. Here are some of the best strategies to become debt free. How debt can negatively impact your life
Organize all of your debt and bills
Before you can devise a debt pay down strategy, you should compile a list of all of your current bills and loans. Go through your bank and credit card statements for the past six months and write down all the recurring loans, bills and other fixed expenses.
Your list should include the monthly payment, total balance, interest rate, term and any other relevant details. For example, you should note if any of the loans are currently in deferment or on a special repayment plan.
To double-check that you haven’t missed anything, look at your credit report to see all current loans and lines of credit.
Make sure to view your credit report from all three credit bureaus. Some lenders don’t report credit activity with all three, so if you only check one or two you may be missing important information.
Strategies to get out of debt
If you’re ready to get out of debt, start with the following steps.
- Pay more than the minimum payment
Go through your budget and decide how much extra you can put toward your debt. Paying more than the minimum will save you money on interest and help you get out of debt faster.
- Try the debt snowball
If you’re paying more than the minimum payment, you can also try the debt snowball method for debt reduction. This debt repayment method asks you to make the minimum payment on all your debts except for the smallest one, which you’ll pay as much as you can toward. By “snowballing” payments toward your smallest debt, you’ll eliminate it quickly and move on to the next smallest debt while paying minimum payments on the rest.
The debt snowball method can help motivate you to focus on one debt at a time instead of multiple, helping you build momentum and stay on track. The only time you should disregard the debt snowball method as an option is if you have a payday loan or a title loan. These loans usually have much higher interest rates, between 300 percent to 400 percent APR on average, and should be paid off as soon as possible.
- Refinance debt
Refinancing debt to a lower interest rate can save you hundreds in interest and help you repay debt faster. You can refinance mortgages, auto loans, personal loans and student loans.
One way to do this is through a debt consolidation loan, which is a personal loan that may come with lower interest rates than your existing debts. If you have credit card debt, you may also consider transferring the debt to a balance transfer card. These cards have 0 percent APR for a specific time frame, usually between six to 18 months.
- Commit windfalls to debt
When you get a tax refund or stimulus check, add the money to your loans instead of saving it in your bank account or splurging on yourself. You can decide to commit the entire windfall or split it 50-50 between debt and something fun, like a future vacation or expensive dinner.
Other unexpected windfalls, like inheritances, work bonuses and cash gifts, can also be used to pay down debts faster. Remember, every little bit helps when working towards your debt-payoff goals.
- Settle for less than you owe
You can also call creditors and negotiate a settlement of your debts, usually for a lot less than you owe. While it’s possible to take care of this yourself, an array of third-party companies also offer debt settlement services for a fee.
While paying less than you owe and escaping old debts may seem smart, the Federal Trade Commission does mention some risks. For starters, some debt settlement companies ask you to stop making payments on your debts while you’re negotiating better terms, which can negatively impact your credit score.
- Re-examine your budget
There are two ways to pay off your debts faster – earn more or spend less. It may not be feasible to pick up a part-time job or side hustle, but you can make adjustments to your budget.
Start by taking a look at each item in your spending plan and arranging them based on their level of importance. Classify each line item as a need or want, and highlight expenses that can be reduced or completely eliminated. Make the necessary adjustments to your budget, and use the money you free up to pay extra on your debts each month.