Getting out of debt isn’t easy. Sometimes it takes all you have to keep up with monthly bills and save for a rainy day. But if you only make the minimum payments to your creditors, you risk getting trapped in debt, and it could take several months or years to dig yourself out of the hole.
There are plenty of ways to get out of debt that won’t make you miserable. You can adjust your budget and free up funds to pay more than the minimum on your debts each month or refinance your accounts using a debt consolidation loan or balance transfer card. Another viable strategy is adopting the debt snowball method or using financial windfalls to eliminate your balances faster. Or, as a last resort, you can settle your debts for less than what you owe. The right strategy for you depends on your unique situation and financial goals.
What’s the average debt per person?
The average American had $96,371 in debt
in 2021. This number includes mortgages, credit card balances, auto loans, personal loans and student loans.
1. Pay more than the minimum due monthly payment
Go through your budget and decide how much extra you can put toward your debt. Paying more than the minimum will save you money on interest and help you get out of debt faster.
Let’s say you have a $15,000 balance on a credit card with 17 percent APR and a $450 minimum payment. If you only make the minimum payment, it will take almost four years to repay the balance. You’ll pay about $5,500 in total interest.
If you paid $550 a month,, you could repay the debt in less than three years and pay only $4,100 in total interest. To learn more, try using a credit card payoff calculator.
How to start: Schedule the extra payment before the due date in the current billing cycle. It can also be added to the monthly minimum payment.
2. The debt snowball
If you’re paying more than the minimum payment, you can also try the debt snowball method
. 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. 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.
Let’s say you have a $5,000 credit card balance, an $1,000 auto loan and $10,000 in student loans. With the debt snowball method, you would focus on paying off the auto loan first because it has the lowest total balance. You’ll see progress quickly when implementing the debt snowball method, motivating you to keep going.
3. Refinance debt
Refinancing debt to a lower interest rate can save you hundreds in interest and help you repay debt faster. You can refinance mortgages, auto loans, personal loans and student loans.
You can use a debt consolidation loan
, a personal loan that may come with lower interest rates than your existing debts. You can also consider transferring the debt to a balance transfer card if you have credit card debt. These cards have 0 percent APR for a specific time frame, usually between six to 18 months.
Refinancing can get you a lower interest rate, predictable monthly payment and set loan term, helping you get to the finish line faster. Research debt consolidation options to determine which are best. If you decide on a debt consolidation loan, get preapproved to find the best rate. If a balance transfer card is your pick, be sure you can afford to pay the balance in full before the promotional period ends.
4. Commit windfalls to debt
When you get a tax refund or stimulus check, add the money to your loans instead of saving it in your bank account or splurging on yourself. You can decide to commit the entire windfall or split it 50-50 between debt and something fun, like a future vacation or expensive dinner .Other unexpected windfalls, like inheritances, bonuses and cash gifts, can also be used to pay down debts faster. Every little bit helps when working towards your debt-payoff goals.
Putting financial windfalls to good use helps build momentum when paying off debt. Decide how you’ll allocate the funds, and apply the amount you choose to your debt balances promptly to avoid overspending.
5. 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, a variety 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.
You’ll only pay a portion of what you owe and can move on knowing you no longer owe those creditors. Contact your creditors to offer settlements and if they agree, get the terms in writing. Or you can hire a reputable debt settlement company to do the legwork for you.
6. Re-examine your budget
There are two ways to pay off your debts faster, earn more or spend less. It may not be feasible to pick up a part-time job or side hustle, but you can adjust your budget.
Start by looking at each item in your spending plan and arranging them based on their level of importance. Classify each line item as a need or want, highlighting expenses that can be reduced or eliminated. Make the necessary adjustments to your budget, and use the money to pay extra on your monthly debts.
You can make short-term financial sacrifices to free up funds that can be used to pay down your balances faster. Assess your spending plan to determine where you can make cuts. Move these funds to your “debt-payoff fund” in your spending plan, and use them to make extra payments on your debts each month.
Being in debt can make qualifying for other loans more difficult and lead to higher borrowing costs. It can also prevent you from landing your dream job.It can be challenging to break the chains of debt bondage. But by following these strategies, you can start making strides toward getting out of debt and improving your overall financial health. Just be sure to understand why you initially got into debt and modify behaviors to prevent yourself from repeating the same cycle once your balances are paid in full.