How to get out of debt

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Consumer debt approached $14 trillion at the mid-point of 2019, according to the New York Federal Reserve. The most consistent areas of debt growth are credit cards and home, auto and student loans. About 80% of Americans have some type of debt, which means that 8 out of 10 American people owe money to a bank, a lender or another entity in some capacity. Having some debt is the norm, but if your debt compounds and becomes unmanageable, you’ll need to know the steps to getting out of debt.

If you are struggling to answer the question of how to get out of financial debt, don’t worry. There are tons of tips and tricks you can learn for how to get rid of debt, and most of the strategies to get out of debt are within your control. It just takes some perseverance, budgeting and some education to get there.

Best ways to get rid of debt for good

If you’re trying to get rid of debt for good, there are ways to do so, including:

Determine total debt amount

In order to create a plan to get out of debt, you need to start by conducting a thorough analysis of the debt you currently have. Begin by creating a list of your monthly income and the amount you’re paying on debts each month. List all sources of income first, and then list all monthly debt, including your mortgage or rent, credit card payments, student loans, car loan payments and any other regular bills, like your utilities or cell phone bills.

Once that’s done, you should calculate your debt-to-income ratio. You can do this by dividing your monthly debt by monthly income, will tell you what percentage of your income is being spent on debts.

For example, if your total monthly income is $2500 and your total monthly debts are $1000, your debt to income ratio is 40%.

When it comes to financial health, most lenders look for debt-to-income ratios of no more than 36%, including mortgage/rent and all other debts. This does not mean you will be comfortable at 36%, however. It is important to determine what you are comfortable with and set that as a goal.

Create a debt repayment plan

Once you know your debt load, it’s time to create a plan and a budget to get out of debt. The good news is that you already have a headstart on this part thanks to the list of debts.

Take that list and rank the debts from most to least pressing. Include a few different factors in your ranking, like:

  • Which debts have the highest interest rates?
  • What is the remaining balance on each debt?
  • Is there a deadline to pay off the debt?

Pay off higher interest rates and higher balance debts first, as these are the debts costing you the most in interest each month. Be mindful of any debt repayment deadlines you have.

You also need to determine where you will get the money to pay off these debts. To do this, you should identify the current spend categories you can reduce. This may mean getting rid of a gym membership you’re not using or a subscription you don’t need.

Differentiate between your needs and wants, and focus on reducing spending in some of the “want” categories.

There are a few other ways to earn extra money to pay off debt, including:

  • Sell items you no longer need.
  • Ask for money in lieu of holiday gifts.
  • Have a “no-gift” policy until your debts are paid off.
  • Use tax returns and/or bonuses to pay against your debts.
  • Get a part-time job to supplement your current income.

Lower your interest rates

There are some ways to potentially lower the interest rates on your outstanding high interest debts, including:

Balance transfer credit card

A balance transfer credit card gives you the ability to move debt from your current credit card to a new card that offers a more favorable interest rate.

Most balance transfer credit cards have an introductory period of 0% APR (Annual Percentage Rate), which gives you a limited window of time to pay off the transferred balance. The intro APR periods typically range from six to 12 months, or in some cases as long as 18 months.

A balance transfer card may offer the answer to your credit card debt, although no solution is foolproof. Some possible drawbacks of a balance transfer card include:

  • You would need to pay off the balance before the introductory APR period ends to avoid paying the regular APR, which may fall in the 14% to 25% range. Those are the rates you’re trying to get away from.
  • Some of these cards require good or excellent credit. Experian considers anything about 700 to be good and anything about 800 to be excellent. If you’re in debt and do not have at least a 700 credit score, balance transfer cards may not be an option for you.
  • Be wary of making the balance transfer card your primary card. Although it may offer 0% introductory APR on balance transfers, the same grace period might not apply to purchases. Check all the terms and restrictions before signing up. We also recommend avoiding additional credit card purchases while trying to pay off debt, unless you can pay off that debt immediately.

Debt consolidation loan

Many lenders offer personal loans for debt consolidation and credit card debt. The potential benefits of this type of debt management include:

  • Lowering monthly payments
  • Reducing what you pay in interest
  • Improving your credit score

If you’ve made progress in paying off the personal loan, you may even be eligible to refinance at a lower interest rate.

Before making a decision, try using an online tool like the Bankrate Personal Debt Consolidation Calculator. You can simulate multiple payment plans and get a better idea of whether a debt consolidation loan makes sense for you.

Still, debt consolidation loans aren’t the right fit for every situation. You’ll need the discipline to repay the loan so that you can avoid accumulating more unpaid debt, which would defeat your debt repayment purpose.

A debt consolidation loan can be secured or unsecured. With a secured loan, you’ll have to put up collateral such as a car or house. Some consumers manage debt by using the equity in their homes to obtain a home equity loan or home equity line of credit (HELOC).

Pay more than the minimum amount

When you make minimum payments on high interest debt, the majority of what you pay goes toward interest and your outstanding balance will reduce at a snail’s pace. Pay as much as possible each month and it will reduce your balance much faster.

Use the list of your expenses you categorized as a want or a need to come up with extra money to repay your debts. Whether you were able to save $10 or $100 per month on wants, use it to pay toward the most pressing debt.

Get a side hustle

Get creative! You have the internet at your fingertips, and you should use it to find a side hustle to help pay down your debt. You may find that there are freelance opportunities that fit your skills, or you could pick up a part time job that you can do after work. You may even be able to find something that you can do remotely.

Get help

Debt relief companies

Debt relief services, often called debt settlement or debt resolution, specialize in negotiating with your creditors to reduce the money you owe them. Using a debt settlement company typically involves this basic process:

  • The money that you would normally send to your creditors as payments instead goes to the debt relief company, along with fees for the service.
  • When your accounts become delinquent, the company begins negotiations with the creditors (or with collection agencies, as the case may be).
  • The settlement comes from the payment money you’ve been sending the debt relief company, minus the company’s fees.

Before you consider using a debt relief company, remember that defaulting on your debts will affect your credit score negatively. The process could take years to complete, and success is not guaranteed.

Observe the same smart shopping rules that you would follow for any other service, including getting the full picture on fees and restrictions. Established companies such as Freedom Debt Relief and National Debt Relief prominently advertise their credentials, which may include Better Business Bureau accreditation.

Debt management

  • Credit counseling: Many nonprofit agencies offer instruction in sound credit practices. A simple online search for credit counseling services in your area can get you started.
  • Debt management apps: Mobile apps such as Debt Free for iPhone and iPad can help you keep track of what you owe and when payments are due.
  • Online resources: The Internet has no shortage of advice for consumers, including resources offered by Bankrate.com. Bankrate also offers tools such as the Credit Card Payoff Calculator to help you figure out how long it would take to become debt-free.

Should you declare bankruptcy?

Put bankruptcy in the category of last resorts and last-ditch efforts. Although it can provide relief for people in serious need of debt management, bear in mind that declaring bankruptcy:

  • Can be expensive. Basic filing fees generally fall in the $200 range, but hiring an attorney (which you probably should) will cost a lot more.
  • Does a serious number on your credit. A bankruptcy filing could stay on your credit report for up to 10 years.
  • Doesn’t work like a magic debt wand. Bankruptcy can discharge many kinds of debts, but not all kinds in all cases. Eliminating student loans through bankruptcy, for example, requires the debtor to meet a high legal threshold.

Still, some cases of severe indebtedness may offer no other option. Seek the advice of a financial adviser and an attorney before taking this big step.

The bottom line

If you feel haunted by the money you owe to creditors, know that getting out of debt is possible. Develop your plan and put it into action. It will take commitment and persistence, but all the efforts will be worth it when the day comes that you can take a deep breath and know you are debt-free.