One of the most important financial lessons that you can learn is that debt is prison. Indeed, when you are paying interest on your debt, that money is going straight into someone else’s bank account — and you receive nothing in return. Plus, paying that interest makes it harder to pay down the principal and to reduce your debt. Even though it might be difficult to get out of debt, it is doable. Here are the steps you can take to get out of debt.
1. Really Decide that You are Committed to Getting Out of Debt
The first thing you have to do is decide that you are really committed to getting out of debt. You need to truly want to change the way you do things, and get serious about paying down your debt and getting on the path to financial freedom. Without the commitment to get out of debt, you are likely to give up.
2. Stop Adding to Your Debt
Take a look at your budget, and figure out how you can better live within your means. Before you can effective tackle your debt problems, you need to stop making purchases with debt. Look at your spending, and cut back on the unnecessary items so that you are living within your means.
3. List all of Your Debts
Next, list all of your debts. List the balances, minimum payments and interest rates. Decide on an order to pay them off. Many people like the “debt snowball” method. You take that lowest balance debt, and concentrate on that first. This method is psychologically rewarding, since you see success faster, and are encouraged to keep going. Others, though, prefer to start with the debt with the highest interest rate, since it will save more money in the long run, since you will get rid of the most expensive debt faster.
4. Decide How Much You can Put Toward Debt Pay Down
Now that you have prioritized your debt list, it’s time to figure out how much money you can put toward your debt pay down. Honestly evaluate your spending, and look for places to cut back. You should be able to find waste in your spending, and, instead of spending it on frivolities, put it toward paying off your debt. Pay the current minimum on all of your debts, except the one at the top of your list. Put your debt pay down amount toward that debt. The more you can put toward it, the better.
5. Look for Ways to Earn More to Speed Up the Process
If you want to speed up your debt repayment process, you can look for ways to earn more money. Start a side hustle. Get a part-time job. It’s only for a little while. If you can put your debt repayment efforts into overdrive, you can be free that much sooner — and you will reap the benefits.
6. Acknowledge Your Successes
You can stay motivated when you acknowledge your successes and take time to reward yourself. Don’t go big though — you want to stay out of debt. But you can hold a little celebration, or you can retire each debt in a creative way. Buy a small treat, or cook your favorite dinner at home. Be sure to mark each milestone, and get excited about your next step toward success.
{ 5 comments… read them below or add one }
If you value your FICO score (credit rating), which everybody should, you should pay your credit cards down in a method that gets all your credit card balances even to or below 30% of the credit limit for that particular card.
Paying down the highest interest rate first might not achieve this goal.
And a low FICO score saves you money on endless expenses – used to calculate the charge for natural gas, home and car insurance and lots more. Today you have to have a high FICO score just to RENT a place or open a checking account. And a high FICO score could even help you get a job!
Debt snowballing is the second of the two examples of paying of debt – you pay the highest interest first and then when that is paid pay off the next highest interest using the same amount of money that you were using to pay off debt previously – therefore each debt gets more money thrown at it and is paid of more quickly – the snowball down the hill effect. Paying off the smallest debt first is not snowballing (unless it happens to have the highest interest rate too)
If you’re worried about your credit rating, Elegia More is right. Getting all your cards below 30% of the limit is a good idea. But if your goal is to eliminate your debt as fast (and as effectively) as possible, then you should definitely payoff the highest interest cards first.
For many people their FICO score isn’t an immediate concern — but paying off their debt is! So I would say go for the highest interest rate cards first — unless you have an immediate reason for trying to raise your credit score.
I think the FICO score was the worst thing ever invented! One problem debt can ruin you and it effects too many areas of your life. We need to go back to the way it used to be.
@deborah
i think a big problem is that it spreads the idea that it is normal, and even advisable, to always have some debts. even though you don’t particularly need that extra money at the moment.
that it punishes people who are financially responsible and simply don’t need a loan.
in countries were creditcards are less common it is usually the practice to simply bundle information on all outstanding loans. meaning that lots of people aren’t even in the system (they never borrowed money), or only with student-loans and mortgages.
these databases are used by banks and other loan-providers (to see if someone has much debts, or a history of non-payment), and by collecting-agencies. an employer typically isn’t supposed to have access to this kind of information.
very shady lenders will advertise with ‘we don’t check the debt-database to determine if you are illegible for a loan’, but only the desperately-in-debt would ever borrow from such a company (of course they ask an interest that’s through the roof. and are known for very aggressive collecting practices. though i suppose the latter is a necessity when dealing with their kind of customers, they know all the tricks of avoiding payments).