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Especially in this economy, one place you\u00a0don\u2019t\u00a0want to find yourself in is debt. Life is expensive enough without hemorrhaging money in interest\u00a0charges.<\/p>\n
Still,\u00a0it\u2019s\u00a0a situation\u00a0that\u2019s\u00a0becoming\u00a0increasingly\u00a0common. If\u00a0you\u2019re\u00a0one of the many looking for an escape from the heavy burden of debt, give these proven strategies a try.<\/p>\n
The first step to getting out of debt<\/p>\n
To be sure, there are powerful strategies to\u00a0eliminate\u00a0debt. But for any of them to work,\u00a0it\u2019s\u00a0critical to\u00a0identify\u00a0and fix the circumstances that caused that debt in the first place. You may be struggling\u00a0because of\u00a0a job loss, a large emergency purchase, or simply impulse purchases. Whatever the case, you\u00a0won\u2019t\u00a0be able to zero out your debt with\u00a0the following\u00a0methods unless you address those issues.\u00a0You\u2019ll\u00a0also need to know:<\/p>\n
How much debt\u00a0you\u00a0have.<\/p>\n
Your total monthly spending on necessities like rent, utilities, food, gas, etc., as well as your\u00a0minimum debt payments.<\/p>\n
The amount of remaining income that can be channeled toward\u00a0paying down your\u00a0debt\u00a0faster than just the minimums would\u00a0accomplish.<\/p>\n
This will give you the information you need to budget properly and help you decide which strategy will best serve your needs.<\/p>\n
Debt snowball method<\/p>\n
The debt snowball method to\u00a0getting\u00a0out of debt is\u00a0a\u00a0simple\u00a0concept: Pay off your balances in order of size,\u00a0starting with the smallest\u00a0and working up to the largest. This is the fastest way to\u00a0eliminate\u00a0the number of outstanding accounts you have, thereby lowering the number of monthly fees\u00a0you\u2019re\u00a0paying toward.<\/p>\n
As you\u00a0eliminate\u00a0your balances,\u00a0you\u2019ll\u00a0free up more of your monthly income to put toward your remaining debt (effectively \u201csnowballing\u201d the amount of funds you can use to pay down your loans).\u00a0Plus, you get the mental win of seeing accounts zeroed out sooner.<\/p>\n
For example, you may have the following\u00a0estimated\u00a0credit card balances\u00a0and payments:<\/p>\n
$2,000 ($70 monthly minimum payment)<\/p>\n
$4,000 ($110 monthly minimum payment)<\/p>\n
$5,000 ($150 monthly minimum payment)<\/p>\n
With the snowball method, you would pay off the $2,000 balance first. This would give you $70 more per month to throw at your next target, the $4,000 balance.<\/p>\n
Debt avalanche method<\/p>\n
The debt avalanche method favors targeting accounts with the highest APR\u00a0(annual percentage rate)\u00a0instead of the lowest balance. The idea is to knock out the cards that are costing you the most in interest. As an example,\u00a0let\u2019s\u00a0say those\u00a0aforementioned\u00a0hypothetical\u00a0credit\u00a0card balances are subject to the following APRs:<\/p>\n
$2,000 (22% APR)<\/p>\n
$4,000 (19% APR)<\/p>\n
$5,000 (27% APR)<\/p>\n
The avalanche method dictates that you focus on the $5,000 balance first, followed by the $2,000 balance. You\u00a0won\u2019t\u00a0lower your number of outstanding\u00a0balances as\u00a0quickly, but you may save money\u00a0on interest charges\u00a0in the long run.<\/p>\n
Debt consolidation<\/p>\n
One of the biggest factors of your credit score is credit\u00a0utilization. This is calculated based on the percentage of revolving credit that\u00a0you\u2019re\u00a0currently using. For example, if\u00a0you\u2019ve\u00a0got a total credit limit of $50,000 and\u00a0you\u2019re\u00a0currently using $25,000 of it, your credit\u00a0utilization\u00a0is 50%.<\/p>\n
Experts recommend keeping your credit\u00a0utilization\u00a0below 30% to avoid\u00a0negative\u00a0impact on your credit score.\u00a0If\u00a0you\u2019ve\u00a0got considerable debt, your credit\u00a0utilization\u00a0may be well above that\u2014which can result in an unimpressive credit score.<\/p>\n
However, if\u00a0you\u2019ve\u00a0still got a\u00a0good\u00a0credit score (ideally 670+), you may opt for one of the below methods.<\/p>\n
Debt consolidation loan<\/p>\n
With a\u00a0debt consolidation loan,\u00a0you\u2019ll\u00a0receive a chunk of cash to repay multiple credit\u00a0card\u00a0and\/or loan balances. This wipes out your current collection of monthly payments and replaces them with a single installment loan payment. Depending on the term length you choose, the new\u00a0loan\u2019s\u00a0minimum payment may be a big one\u2014but it can still be\u00a0considerably less\u00a0than the combined total of the many monthly payments\u00a0you\u2019re\u00a0currently making.<\/p>\n
And because debt consolidation loans are installment loans, the money you use to pay off your credit card will\u00a0almost\u00a0immediately\u00a0improve your credit\u00a0utilization. You may see a huge credit score increase in just a month or two.<\/p>\n
Balance transfer credit card<\/p>\n
You can also\u00a0consolidate\u00a0your debts by opening a balance transfer credit card and\u00a0relocating\u00a0your current debt onto it. Several credit cards come with 0% intro APR for a year or two. That can quite easily save you hundreds (even thousands) of dollars per year, depending on your amount of debt.<\/p>\n
There are two caveats to this strategy:<\/p>\n
You\u2019ll\u00a0often have to pay a\u00a0balance\u00a0transfer fee (typically up to 5% of the transfer amount).<\/p>\n
You can only transfer as much as your balance transfer\u00a0card\u2019s\u00a0credit limit can hold\u2014including\u00a0the balance transfer fee. For example, if you receive a credit limit of $15,000 and a balance transfer fee of 3%,\u00a0you\u2019ll\u00a0only be able to move\u00a0a maximum of\u00a0$14,563 ($14,563 + 3% = $14,999).<\/p>\n
Also, balance transfer credit cards typically require that applicants have good to excellent credit to qualify.<\/p>\n
Increase your income with side hustles<\/p>\n
One word of caution: While making more money is always the ideal, a plan to increase your income will ideally complement your current budget. For example, the goal\u00a0isn\u2019t\u00a0to make more money so you can be more cavalier with your budgeting; rather,\u00a0it\u2019s\u00a0to channel more money toward your balances.<\/p>\n
From freelancing to reselling to rideshare to delivery platforms,\u00a0there are\u00a0numerous\u00a0ways\u00a0one may be able\u00a0to make extra money. Often it takes just a few minutes to register with an app to launch a side hustle.<\/p>\n
Negotiate directly with your creditors<\/p>\n
Did you know that you\u00a0might\u00a0receive more favorable repayment terms simply by calling your lender and asking? You may receive a lower interest rate, a reduced monthly payment,\u00a0even\u00a0a temporary payment\u00a0pause.<\/p>\n
This\u00a0doesn\u2019t\u00a0mean that banks are philanthropists\u2014they want the money you owe them. If they think the\u00a0most likely path\u00a0to repayment is to give you a bit of a break,\u00a0they\u2019ve\u00a0been known to do it.<\/p>\n
Negotiating with your creditors\u00a0doesn\u2019t\u00a0hurt your credit score. However, the bank may treat you differently after the call. Now that the lender knows\u00a0you\u2019re\u00a0struggling, you may find your credit limits lowered (which can indirectly affect your credit score). The bank may also make a note on your credit report that\u00a0they\u2019ve\u00a0given you some sort of hardship plan. This can be a red flag\u00a0to\u00a0other would-be lenders.<\/p>\n
Get professional help<\/p>\n
If you can see a way out of your current debt, there are professional services of varying degrees of severity to choose from.<\/p>\n
Nonprofit credit counseling and debt management plans<\/p>\n
With credit counseling, an experienced counselor will examine your situation and\u00a0advise\u00a0you of your best course of action. If necessary, they may suggest that you enroll in a debt management plan (DMP). This rolls your unsecured debts into a single payment, typically with reduced interest rates.<\/p>\n
The act of enrolling in a DMP\u00a0won\u2019t itself\u00a0hurt your credit score.\u00a0However,\u00a0you\u2019re\u00a0often required to\u00a0close the credit cards\u00a0you\u2019re\u00a0using the DMP to\u00a0consolidate. This can negatively affect elements of your credit score, such as your average length of credit history and credit mix. Your credit\u00a0utilization\u00a0may also increase, as your total available credit will drop.<\/p>\n
All to say, your credit score may drop temporarily\u2014but\u00a0it\u2019s\u00a0a small price to pay for getting your finances back on track.<\/p>\n
Debt settlement<\/p>\n
Debt settlement is more serious than a DMP. Instead of simply\u00a0consolidating\u00a0your debts into one\u00a0feasible\u00a0monthly payment, debt settlement involves\u00a0negotiating with\u00a0your creditors to pay back less than you owe. Debt settlement companies typically ask that you stop paying on your loans\u2014effectively strongarming banks to the negotiating table.<\/p>\n
This strategy wrecks your credit score.\u00a0You\u2019ll\u00a0also likely receive aggressive\u00a0collections\u00a0calls and even lawsuits before\u00a0you\u2019re\u00a0able to settle. Avoid this route if possible.<\/p>\n
Bankruptcy<\/p>\n
The last resort for those who\u00a0can\u2019t\u00a0pay back their debts is bankruptcy. This can erase much of your unsecured debt,\u00a0such as credit cards,\u00a0some personal\u00a0loans, and medical bills. It\u00a0won\u2019t\u00a0make everything disappear, however\u00a0(think tax debts, many student loans, child support, etc.)<\/p>\n
Bankruptcy will blemish your credit report for\u00a0up to 10 years. It can also drop your credit score by hundreds of points. You could even lose assets, such as\u00a0personal property\u00a0and home equity, to pay your creditors.<\/p>\n
The takeaway<\/p>\n
There are many tactics to getting out of debt, from the well-known \u201csnowball\u201d and \u201cavalanche\u201d methods to debt consolidation to debt management plans. No matter your specific financial situation,\u00a0there\u2019s\u00a0likely\u00a0a\u00a0solution for you. None of them are easy (staying out of debt takes discipline enough, let alone digging yourself out of a hole), but with\u00a0smart\u00a0decision-making and\u00a0stick-to-it-iveness, these strategies can help you make real progress.<\/p>\n
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Frequently asked questions<\/p>\n
Where should I start if I feel completely overwhelmed by my debt?<\/p>\n
If you feel completely overwhelmed by your debt, the first place to start is\u00a0auditing\u00a0your current monthly spending. This will help you to understand which areas of your spending you can redirect toward your balances. Once\u00a0you\u2019ve\u00a0got that figured out, you can decide which strategy best works for your situation.<\/p>\n
Should I focus on paying off high-interest debt first or smallest balances first?<\/p>\n
Both of these methods have proven to be an effective way to pay off debt.\u00a0If your multiple balances have similar interest rates, pay the small balances first. If\u00a0you\u2019ve got\u00a0an account with an astronomical interest rate, focus on that first.<\/p>\n
Do balance transfer credit cards really help you get out of debt faster?<\/p>\n
Balance transfers can\u00a0in many situations\u00a0help you get out of debt faster. You can combine multiple debts into one, potentially lowering your monthly minimum payment. Many balance transfer cards also offer 0% intro APR\u2014meaning every dollar you pay on your debt will go toward the principal during the interest-free period.\u00a0It\u2019s\u00a0important to stick to a repayment\u00a0schedule\u00a0so you zero out the card\u2019s balance before the intro APR period ends.<\/p>\n
When should I consider a personal loan to\u00a0consolidate\u00a0high-interest debt?<\/p>\n
You should consider\u00a0a\u00a0personal loan to\u00a0consolidate\u00a0high-interest debt\u00a0if\u00a0you\u2019re\u00a0able to\u00a0obtain\u00a0either a notably lower minimum monthly payment or a\u00a0considerably lower\u00a0interest rate than the one(s)\u00a0you\u2019re\u00a0currently paying.<\/p>\n
What\u2019s\u00a0the difference between debt consolidation, debt management, and debt settlement?<\/p>\n
Debt consolidation is the act of rolling multiple debts into one. Debt management is working with a credit counseling agency on a structured repayment plan, typically with a single monthly payment and a lower interest rate. Debt settlement is negotiating with your creditors to repay less than you owe\u2014often after your accounts have become delinquent.<\/p>\n
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