Getting out of debt isn’t easy, and that’s especially true when you don’t have a money tree growing in your backyard. 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 cards and loans.
Still, Fidelity’s 2020 New Year Financial Resolutions Study shows that Americans are fairly optimistic about getting their finances in order in the new year. According to the survey, 67 percent of respondents said they’re considering making a financial resolution for 2020, up from 61 percent a year ago. One of the top things motivating people is the goal of “living a debt-free life.”
Fortunately, there are plenty of ways to get out of debt, and not all of them will make you miserable. Some of the strategies we outline below can even be used in tandem in order to help you squash debt faster.
Strategies to get out of debt
Ready to get out of debt? Here are 10 ways to get started.
1. Pay more than the minimum payment
One way to expedite debt reduction involves paying more than the minimum payment on your credit cards and loans each month. This strategy works well since every penny you pay over your minimum monthly payment goes directly toward the principal of your loan.
The more you can pay each month, the faster your debts will disappear. Just make sure your lenders don’t charge a prepayment penalty before you try this strategy.
2. 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.
Over time, you’ll pay off each of your smallest debts until only a few are left. Eventually, all your debts will be gone.
3. Consolidate debt with a personal loan
If you have a lot of debt at a high interest rate, the best way to get out of debt is probably debt consolidation with a personal loan. This strategy involves applying for a personal loan with a lower fixed interest rate and paying off all your existing debts with the loan proceeds. From there, you can focus on repaying all your debt with a single personal loan that has a much lower APR.
Personal loans tend to work well for debt consolidation and debt repayment since they come with fixed interest rates, fixed monthly payments and fixed repayment periods. As a result, you’ll know exactly how much you’ll owe each month and exactly how long your debt will take to pay off.
4. Transfer balance to a 0% APR credit card
You can also consider transferring your debts to a new credit card that extends 0 percent APR on balance transfers. Many cards in this category let you avoid interest for anywhere from nine to 21 months, although some do charge a balance transfer fee upfront for the privilege.
With a balance transfer credit card, you can avoid interest and throw as much money as you can toward your balance to pay down debt faster. Just remember that your card’s introductory interest rate will eventually reset to the higher standard variable rate.
5. Ask creditors for a lower APR
If you have credit cards with higher interest rates than you really want to pay, picking up the phone to ask for an interest rate reduction can help. It’s possible your creditors will work with you in order to make your monthly payments more affordable. The worst they can say is “no.”
6. Earn more money
If you’re tight on funds each month and can’t seem to earn enough money to pay extra toward your bills, it may be time to ramp up your earnings in whatever way you can. This may mean picking up more hours or shifts at work, but it could also mean consulting on the side or picking up a side gig or part-time job.
If you find a way to earn more money, make sure all the extra cash you bring home is used to pay off your debts. If you wind up spending it, you won’t be any better off.
7. Dramatically cut your expenses
While earning extra money to use toward debt repayment is a smart move, cutting your expenses and finding new ways to save money can help you accomplish the same goal. Cutting back on spending can also be easier and less time consuming than working more hours, and don’t forget that you can do both.
Start by cutting the “low hanging fruit” from your life, whether that’s reducing the number of times you dine out each month, cutting your grocery spending or eliminating your entertainment budget until you’re debt-free.
Just make sure you allocate any newfound savings to debt repayment before you find another way to spend it.
8. Start using a monthly budget
Creating a monthly budget can also be immensely helpful if you’re trying to find money to use toward debt repayment. You may even find that, once you start tracking your spending and writing down your bills and liabilities each month, you’re spending a lot more than you realized in categories you have some control over.
While there are plenty of budgeting software programs and apps, you can create a monthly budget yourself with a pen and paper. All you have to do is figure out your monthly take-home pay then write down each of your monthly bills, debts, and fluctuating expenses in another column. From there, get out old credit card and bank statements to figure out where all your money has been going and how you might allocate it better in the future.
Using a budget is a smart way to force yourself to confront your spending decisions in black and white — even if you don’t want to.
9. 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.
10. Stop racking up more debt
Finally, don’t forget that you’ll never get out of debt if you don’t change your spending habits. In other words, stop using credit cards to buy things you can’t afford, and stop borrowing money in other ways!
To create a debt repayment plan that works, you need to stop adding to the pile. While you’re in debt payoff mode, consider switching to cash or debit instead of credit. And make sure you refrain from taking out new loans unless you absolutely have to.
Learn to live within your means instead of constantly using credit as a crutch, and you’ll be a lot better off.