While I can think of many things I think should be taught in every high school, perhaps on the top of my list is how to properly use credit. All the financial skills I have today were learned the hard way, and were accompanied by many of the repercussions that result from stumbling along the credit-and-debt learning curve.
The combination of over-availability and under-education has led many down the path to debt, and once there, it can be difficult to find your way out. Depending on the severity of your debt, and the complexity of its sources, even knowing where to begin may seem nearly impossible.
Our experts have composed a guide to getting out of debt, featuring 15 things you can do to help get back on financial track. See our general advice on how to get started, or jump ahead to tips on your particular type of debt.
How to Start Paying Off Debt
Figuring out where to start paying off your debt can be tricky, especially if you have several types or multiple lenders. The best way to start the process is to get a handle on your debt and make a plan. To do that, you’ll need your credit report.
1. Check Your Credit Report (Regularly)
Whether we like it or not, our financial lives are often dictated by the contents of our credit reports, and that’s where you should start your journey to debt freedom. Each of the three major credit bureaus will issue you one free annual credit report, and you should take advantage of this offer every year.
Your credit reports will show your entire debt picture, outlining who you owe and how much you owe them. If there are any mistakes on a report, such as an incorrect balance, or accounts you don’t recognize, you should address them immediately. A good credit repair company can make the process super simple.
2. Prioritize Your Debts
Once you know your exact debt situation, it’s time to prioritize. It’s likely that some of your debts are costing you more to maintain than others, so determine your most expensive debts and pay those off first. Be careful, though, as it’s not always the largest balance that is the most expensive. In general, it’s better to focus on the highest interest rates, rather than just the largest balances.
Take a look at the table below showing the actual cost of carrying three different debt balances based on to their interest rates.
|Initial Balance||Annual Interest Rate||Cost to Carry a Balance|
As you can see, the $1,000 balance with the 20% interest rate actually costs more to carry than the higher balances with lower interest rates, and therefore should be paid off first. Make sure you analyze all the variables of your debt, not just the flat balance.
3. Create a Budget
Developing a realistic budget, and maintaining it, is the key to a healthy financial life for anyone, but is particularly important when you are trying to pay off debt. In addition to knowing your debt priorities, making a budget will require that you know where all of your money spends its time, both coming and going.
With a firm grasp on your financial needs, you can easily make a budget that includes all of your income and expenses, as well as account for the addition of payments to your most expensive lenders. Of course, making the budget is often the easy part, while sticking to the budget can be quite difficult.
4. Use a Debt Calculator
One of the largest parts of maintaining your budget is to make sure it is realistic in the first place. It’s all well and good to plan to pay off all of your debts at once, but if your income doesn’t actually support that goal, no amount of budgeting will make it work.
A variety of calculators and budgeting tools exist on the market these days, such as this simple one from CNN Money, or this more advanced debt calculator from TCalc. You can also download any number of cellphone applications, like this popular Android financial calculator app from Bishinews.
A good debt calculator or budgeting app can make it easier to prioritize your debts, as well as determine what kind of monthly payments you can afford, and how long it will take to pay off each debt, making it easier to set realistic budget expectations.
How to Pay Off Credit Card Debt
Millions of Americans take advantage of credit cards to make large purchases, or just day-to-day ones, that they otherwise could not afford. When not paid off regularly, though, credit card debt has a tendency to expand — rapidly. The high-interest rates often associated with credit card debt will likely make it a strong contender as your most expensive debt.
5. Pay More Than the Minimum Balance
The real key to getting — and staying — out of credit card debt is to always pay more than the minimum balance. The tiny minimum payment is designed with one thing in mind: to make your lender money. The longer you are paying back that loan, the more interest the lender makes, and interest gets expensive.
To put it into numbers, imagine a $5,000 balance on a card with a 10% interest rate. If all you ever pay is the $50 minimum monthly payment, it will take 18 years to pay off the original balance — and you’ll have paid more than the original balance in interest. As the table below illustrates, the more you pay each month, the less you pay in the long run.
|Monthly Payment||Total Interest Paid||Total Cost||Months to Pay Off|
Even an extra $25 a month can make a huge difference to the bottom line of your debt, cutting hundreds or even thousands in interest payments, not to mention taking months off the time it will take to pay off the balance.
6. Eliminate Impulse Purchases
If there is one thing that’s had the biggest impact on my personal spending habits, it’s been online shopping. With just a few clicks I can shop, find, and buy to my heart’s content — all without entering my payment information more than once.
Impulse spending is a budget killer, and it is especially easy with a credit card that can be stored for one-click shopping. Start by eliminating the ability to online impulse buy, by removing stored credit cards from online shopping accounts. You may also want to delete any super convenient, and therefore super impulse-enabling, shopping apps from your cellphone (just in case).
The general rule of thumb? Treat your credit card like cash. Don’t charge it if you don’t have the cash to back it up, and pay off the card as soon as you can.
7. Use Balance Transfers (Wisely)
If you’re struggling with a particularly high-interest credit card and have good credit, you may want to consider taking advantage of a credit card balance transfer. Not only are there a number of cards that offer no-fee balance transfers for new applicants, but many also provide an introductory period with 0% APR.
Make sure to read the fine print on your new card, as the interest rates can be quite high once the introductory period ends. You also don’t want to stop or decrease your payments just because the transferred balance isn’t carrying as high an interest rate, or has a period of no interest — use the breathing room to pay down your balance.
8. Take out a Credit Card Consolidation Loan
For those carrying a lot of high-interest credit card debt but who don’t qualify for a good balance transfer offer, a consolidation loan may be a good option. Consolidation is the process of taking out a single, larger loan to pay off a variety of smaller loans.
Consolidation is a good way to simplify your debts, as you’ll pay a single lender instead of multiple lenders. If your consolidation loan comes with a better interest rate than your previous debts, or a longer payment term, you may also be able to lower your overall monthly payments. Keep in mind that consolidation does not reduce your overall debt.
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|Loan Amount||Interest Rate||Loan Term||Loan Example|
|$500 to $35,000||5.99% - 35.99%||3 to 72 Months||
See representative example
How to Pay Off Student Loan Debt
It’s easy to see why so many are willing to take on debt to get a good education; it seems that nearly every decent job requires at least a four-year degree these days. Unfortunately, that piece of paper from your university is likely to cost thousands, and student loans are the only way many can afford the price. Carrying that debt into your fledgling career can be painful, but paying off your students loans doesn’t need to be a lifetime commitment.
9. Change Your Spending Habits
An important part of dealing with your student loan debt is to make changes in your lifestyle to accommodate that new bill. Whether it’s cooking at home rather than eating out, or skipping the morning mocha, small changes in your spending habits can add up to big savings on your overall student loan debt when the excess is applied to your balance.
Many starting to pay off student loans are also beginning to enter the workforce; don’t let the new job go to your head. As your career, and thus your income, grow, use job bonuses and raises to attack your debt — not your living room entertainment system.
10. Find Ways to Make Extra Money on the Side
When your current income just isn’t enough to meet your student loan payments, or just to pay them off as quickly as you’d like, there is always the option to increase your income. Here are a few ideas:
- Run errands for friends and neighbors
- Get a seasonal part-time job
- Start your own business selling handmade goods
- Check websites that offer odd jobs, such as Fiverr
Though you’re not likely to retire on your side income, even a little extra money can have big results when applied to an expensive debt.
11. Consider Student Loan Refinancing
If the interest rates on your student loans are making it difficult to make any headway, you may need to consider refinancing your loans. Refinancing is the process of taking out a loan with a lower interest rate to pay off high-interest debts.
Refinancing is a good option to lower your overall monthly payments, but only if the rate of the refinance loan is actually appreciably lower than your existing loan. You’ll also want to be careful not to get a new loan with terms that significantly extend the amount of time it will take you to pay off your debt.
12. Take Advantage of Company Programs
One of the best ways to pay off your student debt may actually come from your employer; many companies now offer student loan repayment programs. These programs, often referred to as student loan forgiveness, offer to get rid of, or “forgive,” a certain amount of your student loan debt as an incentive to take a particular job, or work in a certain location.
While the majority of student loan forgiveness programs are associated with government jobs, such as those for teachers or members of the military, they’re starting to show up in the private sector, as well. The main thing you should be aware of when it comes to a forgiveness program is the job length requirement — you’ll generally be required to maintain your position for a set period.
How to Pay Off Debt in Collections
The seemingly never-ending calls from collectors are just the tip of the irritation iceberg when it comes to dealing with debt that has reached the collections stage. However, there are options for getting your debt under control and eliminating the collections harassment.
13. Consolidate Your Debt
If you have multiple debts that have reached collections, a debt consolidation loan may be the way to go. In consolidation, you’ll use a single loan to pay off several smaller loans, thus simplifying your debt as well as, hopefully, bringing your debt back up-to-date. Remember that consolidation doesn’t reduce your debt, and it may even increase the amount you end up paying by increasing the duration of your loan.
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|Loan Amount||Interest Rate||Loan Term||Loan Example|
|$1,000 to $35,000||5.99% - 35.99%||3 to 72 Months||
See representative example
14. Work With a Debt Relief Company
For those who are overwhelmed by their debts, or just the collections calls, consider a debt relief company. A good debt relief agent will analyze your debt situation and help you chart a course to a debt-free life. They’ll then be able to match you with an appropriate loan, set you up on a payment plan, or negotiate with your creditors to help make your payments more manageable.
15. Bankruptcy as a Last Resort
While it may have been more common at one point, declaring bankruptcy should always be your last resort. Bankruptcy has a large negative impact on your credit score, can take up to 10 years to come off your credit report, and needs to be reported on certain government and employment documents for life.
All that said, sometimes it may really be the only option you have left. In that case, be sure to choose a reputable resource from which to get your bankruptcy assistance, such as our expert’s pick below.
There are some types of debt that cannot be expunged through bankruptcy in most cases, including some types of student loans. Make sure to do your homework before deciding to undergo bankruptcy.
What’s the Best Way to Pay Off Debt?
Until they begin to teach financial awareness and how to use credit in high school, we’ll have to make due with the resources at hand — and life’s hard lessons. Hopefully, you can make it through the learning curve with fewer stumbles than I did.
Just as everyone has his or her path to getting into debt, there is no one path to becoming debt-free. The best way to manage your debt is the one you can afford to maintain. Becoming debt-free is not an overnight process, and will require dedication or even a change in lifestyle.