Debt can seem insurmountable, especially when you have high-interest debt that seems to accumulate interest faster than you can make payments. It is still possible to pay off debt. People get out of debt every day and you can do it too. You’ll have to be organized, disciplined, persistent and patient, but the goal is worth the effort. Let’s look at four strategies that have helped other people pay off their debts and at what you’ll need to do to use them effectively.
Know Your Debts
Before you start looking at debt repayment strategies, it’s important to understand what you owe and what the terms of your debts are. Make a list of your debts, noting these features:
- The Total Amount of the Debt
- The Due Dates and Minimum Monthly Payment Amounts
- The Interest Rate
- Any Special Terms (Like Prepayment Penalties or Late Payment Penalties)
It’s also important to understand your credit. If you’re setting up a debt repayment strategy you may wish to check your credit and get copies of your credit reports. Some debt repayment strategies require good credit, others are more appropriate for people with damaged credit.
Four Ways to Pay off Debt
There are several proven approaches to paying off debt. Each strategy has advantages and disadvantages. There is no “best” approach for everyone:
- Debt Snowball. The debt snowball is a great choice for people who have trouble getting motivated and staying focused. You start by concentrating on your smallest debt. Make only minimum payments on your other debts and put every spare penny into that smallest debt. When it’s paid off, celebrate your win and go on to the next smallest debt. The sense of achievement you get from paying off smaller debts will help you focus on the larger ones.
- Debt Avalanche. If you’re focused and disciplined and want to take the most pragmatic approach, try the debt avalanche. Again, you’ll focus on only one debt and make only minimum payments on all of the others. This strategy focuses on the debt with the highest interest rate first. Retiring that debt saves you not only the payments on principal but also the accrued interest. When your highest-interest debt is paid, move on to the debt with the next highest rate.
- Debt Consolidation. This strategy works best if you have multiple high-interest debts that you’re having a hard time organizing. It also requires at least good credit. It’s a good choice if you’re having trouble with credit card debt but haven’t missed payments yet.
Debt consolidation involves taking out a loan at a lower interest rate, using it to pay off those higher-interest balances and then focusing on paying off the loan. You can also consider a balance transfer credit card with a zero-interest promotional period as a consolidation device.
- Debt Management Plan. If you’re overwhelmed by debts and don’t know where to begin, consider a debt management plan. You’ll work with a non-profit credit counseling agency, which will help you set up the plan. You’ll make a single monthly payment to the agency, and they will distribute it to your creditors. The agency may also try to negotiate better deals with your creditors.
Look closely at these four ways to pay off debts and choose the one that best fits your needs.
Find the Money
Debt strategies are not magic, and they won’t pay your debts for you. No matter which way you choose to pay off your debts you will have to free up money to make the payments. Here are some steps that will help you do that:
- Stop borrowing. No debt reduction strategy will succeed if you keep piling on new debt, especially high-interest credit card debt. If you’re determined to pay off your debts, you’ll need to keep credit card use to a bare minimum and avoid new borrowing until your current debt problem is resolved.
- Track your expenses. You can’t manage your money if you don’t know where it’s going. Use an app, use a spreadsheet, use a notebook and pen if you like but track every expense for at least a month. You’ll gain a better understanding of how you’re spending money and where you can save.
- Make a budget. Once you understand how you’re spending, decide how you want to spend. Decide which expenses are essential and which you want to cut. Be sure to budget funds for paying off debts.
- Follow your budget. Making a budget is the easy part. Sticking to that budget will take discipline and perseverance but seeing your debts diminishing should help motivate you to continue! The key to getting out of debt and staying out of debt is recognizing and changing the habits that got you into debt in the first place. Following a budget can help you do that.
- Add to your income. Earning more money can help you pay off debt faster. Ask for a raise, work more hours, or consider taking on a second job or side hustle. It’s a sacrifice, but beating debt sometimes requires sacrifice.
These measures can combine to give you more available cash and more resources to pay off those debts.
Consider Debt Relief
If you are deeply in debt and have no realistic way to make your payments, you can consider these debt relief options:
- Hardship plans. Some creditors, particularly credit card companies, offer hardship plans to assist debtors affected by medical problems, job loss, or other circumstances beyond their control. These programs are often not advertised; you’ll have to ask your card issuers.
- Loan modification. If your debt problem is focused on one large debt, like a mortgage or student loan, ask your lender about loan modification. Lenders don’t want you to default and a lender may be willing to adjust your loan terms to make the payments easier for you. Lenders may even give you a temporary break from payments, called forbearance or deferment.
- Debt settlement. Creditors or collection agencies may be willing to settle a debt for less than the amount owed if they believe it’s the only way to get anything from the debt. Settlement can damage your credit and is normally something you’d only consider as an alternative to bankruptcy. Beware of debt settlement companies, which are often sketchy. You can settle debts yourself.
- Bankruptcy. If you have large amounts of unsecured debt and absolutely no way to pay it off, you can consider bankruptcy. The process is difficult, and your credit will take a serious hit, but it can get collectors off your back and give you a new start.
These are last-resort measures that you will only use if you’re truly overwhelmed, but if you have no other options they are possibilities to consider.
Getting out of debt is not easy. It takes time and sustained effort. You’ll have to adopt a plan and budget your money more carefully. The payoff of a debt-free life is worth the struggle and you may pick up some financial habits that will help you stay debt-free and build savings.