Bills Piling Up? Here are 7 Tips for Getting Out of Debt
Updated : August 4th, 2022
Paying off too much debt can feel like an insurmountable mountain. But there are a few simple, actionable ways to get out of it.
How To Get Out of Debt
- Make a Budget
- Use a Personal Finance App
- Consolidate Loans
- Talk to a Credit Counselor
- Enroll in a Debt Management Program
- Refinance your Existing Loans
- Be Strategic about Paying Down Debt
The truth of the matter is that most Americans need debt to finance major life purchases like a home and a car. But they often take on other forms of bad debt, like racking up a credit card balance on the best credit cards for points and cash back.
By the time they’ve gone through several decades of swiping and financing, they may have racked up tens of thousands of dollars of debt even outside of their mortgage debt…and that can be very hard to pay off. However, with some dedication and implementation of tested strategies, even a mountain of debt can be moved or chipped away.
It’s plain to see that inflation is reaching the highest rates it has in decades. For most consumers, inflation is higher now than it has ever been. This means that the price of simple goods and services has drastically risen, making it harder for the average American to make ends meet.
Even though many Americans were issued stimulus checks during the Covid Pandemic, and some of them even collected PUA (Pandemic Unemployment Assistance), many of these Americans have burned through those bonuses and are not needing to rely on credit to get by. Additionally, the price of goods that consumers typically purchase with debt (like vehicles and homes) have sharply risen, as have interest rates. Putting the two together means more debt all around.
Tips for Getting Out of Debt
1. Make a Budget
One of the biggest reasons that people get into debt in the first place is because they spend more than they can afford. You might be surprised to learn that this spending doesn’t always include large purchases like a home or vehicle. The financial institutions that extend these kinds of loans do their due diligence and make sure the debt-to-income ratio of potential borrowers is low enough to ensure they can make their minimum monthly payment. It’s actually the everyday purchases that add up: gas and groceries, along with discretionary purchases like entertainment and vacations.
Studies show consumers who use credit cards regularly often tend to spend beyond their means. The buy-now and pay-later mentality encouraged by swiping plastic often leads to shooting first and asking questions later, as the saying goes.
One thing that might go hand in hand with forming a budget is cutting up your credit cards, at least for the time being. As obvious as that might seem, there are a number of consumers who continue to use them even as their mountain of debt grows. Making a budget and sticking to it by spending only within your means is a solid foundation for getting out of debt.
2. Use a Personal Finance App
One of the best ways to budget is to use a personal finance app. Most people do not want to write down all their purchases every day, let alone categorize them and study their different spending habits to see where they can trim the proverbial fat. That’s where a personal finance app comes in.
Such an app can link to your debit card or bank account to itemize your spending and break it down into categories. Then it will offer suggestions for improvement, such as canceling subscriptions you don’t use or reducing the number of times you eat out per week.
Some of the more popular personal finance apps include Mint, Honeydue (especially for couples), and EveryDollar, the last of which will help you toward a practice called zero dollar budgeting (where you are sure to not spend beyond your means). Some banks are now starting to offer budgeting and spending report applications as part of their online banking platforms, so if you are banking at one of these financial institutions you may not need a separate app to categorize and study your spending.
3. Consolidate Loans
Another very useful tool for ending the household debt crisis is loan consolidation. Loan consolidation involves rolling several loans into one, such as using a balance transfer to bring several outstanding credit card balances to a single creditor.
Wondering what the benefit is of consolidating all your loans? It’s an effective way to lower the interest of all your loans. The consolidating lender is going to provide a lower interest rate than your current creditors as an enticement to transfer your debt. Lower interest rates mean less interest, which means less debt and lower monthly payments.
One of the most common examples of this process is the balance transfer. A credit card issuer will offer the cardholder a promotional interest rate of 0% for 18, 21, or 24 months. They will then pay off the customer’s outstanding credit card balances at other financial institutions, bringing that debt over to themselves. Since credit card interest rates usually range around 20%, this is a significant improvement in terms of the monthly payment and the total balance. Loan consolidation can also be used to bundle up other types of debts like a personal loan, HELOC, or even a car loan.
4. Talk to a Credit Counselor
Sometimes a credit counselor can provide some nuanced guidance for a consumer facing a seemingly insurmountable amount of debt. A credit counselor can draw from their experience in personal finance and create a personalized budget plan for a distressed debtor, along with pointing them to the right resources for avoiding foreclosure or filing for bankruptcy. As average American debt by age will show, different demographics are carrying different types of debt and have a variety of situations around their cash flow.
Boomers are entering retirement and looking at fixed incomes, often with paid-off homes but perhaps unfinished student loans for their children.
Millennials are carrying significant amounts of student debt but have eschewed home ownership. With decades in the workforce still ahead of them, they need to make different choices around purchasing and credit. A credit counselor will take time to get to know you and your financial and personal goals, in addition to your credit history and personal finance.
5. Enroll in a Debt Management Program
A debt management program is often a special type of loan consolidation opportunity whereby a debtor in distress can have their new creditor create a repayment plan with their current creditors. Sometimes, the debt management program will negotiate on behalf of the debtor to reduce some of the debt or lower the interest rate. This debt reduction program or debt settlement can relieve some of the debt stress felt by a struggling creditor who now has more time and/or a lower balance or interest rate as part of the debt management plan.
Other times, a debt management program may be offered by the lender directly to the borrower whereby they lower the interest rate or sometimes the total balance. Do not be ashamed to contact your creditors and say that you are interested in learning more about debt management options. If you indicate that you are getting credit counseling and are serious about paying off your debt as fast as possible, they may be more than willing to work together to come up with a debt payment plan.
6. Refinance your Existing Loans
Similar to the idea of bringing multiple debts together under a new balance transfer credit card, another way of paying down debt faster is to refinance it. A refi is not specifically a debt consolidation, but it works along the same principles by providing the borrower with a lower interest rate, and often more time to pay down the refinanced loan.
This strategy is most often used with a large amount of existing debt, say something like a mortgage or car loan. A home refi, for example, can be an excellent way to lower your monthly minimum payment. That’s because the remaining balance on your mortgage will once again be stretched out among 30 years (or 15), as opposed to however much time you had left on the original mortgage. The extra money you have from the refi can be used to make an extra payment towards some of your other debt, helping you reach your financial goals of living debt free much sooner.
7. Be Strategic about Paying Down Debt
It can be tempting to pay off your smallest debt first if you can afford to make additional payments. But you might also consider putting your money towards the debt with the highest interest rate.
Which strategy works best? Some credit counselors are adamant about starting with the smallest and working your way up, using something called the Debt Snowball Method. The debt snowball strategy can relieve debt stress by helping you knock out one loan at a time, and putting the money you put toward that into the next one, working your way up.
Others insist upon using the Debt Avalanche Method. The debt avalanche involves putting extra money toward the debts with the highest interest rate. There are pros and cons to each approach. The avalanche method might save you some more money because of the higher interest rate, but the snowball method can be better for gaining momentum and encouragement towards meeting your financial goals. Whatever the case may be, part of the strategy in paying down debt involves not making the same mistakes again, which is why all our other pointers should be taken into consideration.
Should I Consider Bankruptcy?
When you hear the term bankruptcy, you may associate it with failure in the realm of personal finance. Really, nothing could be further from the truth.
Chapter 7 bankruptcy is a powerful tool that is used to wipe away debt and start over with a clean slate. This type of bankruptcy (as opposed to chapter 11 and chapter 13) wipes away unsecured debts like credit card debt and personal loans. It cannot be used as a form of student loan forgiveness, nor can it wipe away your mortgage.
However, it can be used to restructure your mortgage so that you have more time to pay it off. Another benefit of filing for bankruptcy is that creditors cannot call and harass you for repayment. Chapter 7 bankruptcy also provides important exemptions for home and personal property such as a vehicle. You will not be required to sell off things you need to survive in order to satisfy your debts. For all these reasons and others, filing for bankruptcy is more often than not the best option for consumers who have found themselves underneath a mountain of debt.Debt
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