You can get out of debt by refinancing your debt, settling your debt or making adjustments to your budget. Bringing in additional sources of income is also a great way to pay off debt.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
If you want to get out of debt, there are many ways to do so, from refinancing or settling debts to bringing in additional sources of income. Learning how to get out of debt is a unique process because different methods may work better for different people depending on a number of factors, like your other expenses and your ability to make adjustments to your budget.
Fortunately, by developing good habits to take care of debt as soon as possible, you can prevent your debt from becoming unmanageable in the future. Read on to learn 12 tips for getting and staying out of debt.
How debt negatively affects your life
When you have too much debt, it can cost you additional money, hurt your credit and cause additional stress for you and your loved ones. Having some debt is normal, and it can even help with your credit when you’re able to show that you can pay off your debts in a timely manner. But once your outstanding balances start adding up, you can start to experience some of the negative effects of debt.
Whether it’s your credit cards, auto loan or home loan, each debt comes with interest payments, which can lead to more debt. In 2021 NerdWallet reported that the average interest rate for a credit card was roughly 14.6 percent.
To put that into perspective, $5,000 at that rate would cost you over $7,000 in interest if you paid $117 each month for five years. To avoid paying a lot of money in interest, try these tips for getting out of debt.
12 tips for getting out of debt and staying out
Below, we’ve listed 12 different ways to get out of debt. The best way for you to get out of debt will be unique to your specific situation.
1. Use the snowball method
The snowball method involves paying off your smallest debt in full and slowly working your way up to your largest debt. This is one of the most popular methods because it helps you build momentum as well as confidence that it’s possible to pay off your debts completely.
Each month or each paycheck, take a look at your smallest debt and contribute as much money to paying it off as you can. For this to work, you’ll also need enough money to make the minimum payments on your other debts to avoid late or missed payments. Some people find it helpful to save money for a few months beforehand to ensure they have enough to do this method.
Best for: Low- and medium-level debts
2. Refinance your debt
Refinancing your debts can help by lowering your interest rates, which will help you pay your debts off faster and save you money as well. Some of your debts that you may be able to refinance include:
Banks and financial institutions often refinance as a way to keep you as a customer. If you’ve been a customer for a long time, you have a better chance of being approved for a lower rate due to your loyalty. If your credit score is much higher than when you originally received your loan, you’ll also have a better chance of being approved.
Best for: Debts with high interest rates
3. Find sources of extra income
Finding sources of extra income can help you utilize some of the other tips listed here, as it will allow you to make larger payments. For example, having extra money can help you use the snowball method without having to worry as much about your other bills.
Here are some common ways people bring in extra income:
- Ask for more hours at work
- Do gig work in your free time, like ride-sharing
- Ask for a raise
- Utilize your knowledge and skills to start a side business
- Sell property
Many people want to know how to get out of debt on a low income, and getting creative by finding additional sources of income is one of the best ways to do this.
Best for: All forms of debt
4. Pay more than the minimum
Making more than your minimum payment is going to help reduce the additional amount you have to pay due to interest. WalletHub reported that most minimum payments are $25 to $35 or about 1 to 3 percent of your total balance. If you only pay the minimum, it can take you years to pay your balance, and you’ll pay thousands in interest.
Fortunately, you can greatly reduce the cost of interest by paying more than the minimum amount. This is a way to get out of credit card debt without paying much more than the amount you originally borrowed.
Best for: All forms of debt for people with additional disposable income
5. Make extra payments
Making extra payments in addition to your scheduled monthly payments is similar to paying more than the minimum. What’s different is that this is a habit you can develop whenever you see you have some extra money. For example, if you spend less on groceries or other expenses in a given month, you can make an extra payment with the additional funds.
This is a great strategy if you have multiple income streams and get paid at different times. Each time you receive money, you can make an extra payment toward your debts.
Best for: Larger high-interest debts
6. Try to settle debts
Sometimes, you can negotiate with your creditors to settle debts for a lower amount than what you owe. This is an ideal strategy for people who have debts that are in collections. Collection agencies often buy your debt for less than what you originally owed, so they’re willing to settle your debt for less as well. Collection accounts can also hurt your credit, so it’s a good idea to make these debts a priority.
Best for: Older debts and debts in collections
7. Examine your budget
Taking a look at your monthly spending habits and finding areas to cut back provides you with additional money to pay toward your debts. What many people do is keep track of their receipts during the month and then analyze the receipts at the end of the month. From here, you may be able to find places where you can reduce your spending, such as eating out or buying luxury items.
Many people are surprised by how much they’re actually spending, and it can add up. Fortunately, it also adds up when you make minor changes to your budget. Saving $20 here or $50 there each month can provide you with $100 or more to put toward your debts.
Best for: All forms of debt and all income levels
8. Consolidate your debts
Debt consolidation works by taking multiple debts and turning them into one. This is similar to refinancing in that it can save you money in interest, which helps you pay your debts faster. You’ll need to find a lender who will assist you with a debt consolidation loan, which will ideally be at a lower interest rate than the rate you’re paying.
Best for: Numerous debts from multiple lenders
9. Use the 2x rule
The 2x rule is a budgeting strategy that requires you to pay off a portion of your debt any time you want to buy something you don’t necessarily need. For example, if you wanted to buy a new clothing item for $100, you would not allow yourself to buy it unless you could pay the same amount toward your debt. Not only does this help you pay off your debts, but you’ll also save money on items that aren’t necessities.
This is a common strategy for people who are saving or investing. Once your debts are paid off, you’ll already be in the habit of following the 2x rule, which will help you save for retirement or larger expenses like trips or a new home.
Best for: People with additional disposable income
10. Set S.M.A.R.T. goals
S.M.A.R.T. goals help you set realistic goals for paying off debt. People often use S.M.A.R.T. goals for completing projects or self-improvement, and these goals are useful for your financial life as well.
S.M.A.R.T. goals are Specific, Measurable, Achievable, Relevant and Time-bound. Here are some questions to help you set S.M.A.R.T. goals:
Specific: What’s the exact dollar amount of debt you want to pay off?
Measurable: How much will you need to pay each month to reach your goal?
Achievable: Be honest—is your debt payoff goal realistic and attainable?
Relevant: Why is this specific goal important in the context of your overall finances?
Time-bound: When do you want to have this amount of debt paid off by?
Best for: Anyone who wants a plan to eliminate debts
11. Track your progress
Tracking your progress helps you see that it’s possible to pay off your debt, and you can look back to see how far you’ve come. When you’re making monthly or biweekly payments on your debt in small amounts, it’s sometimes difficult to see positive results. Tracking your progress helps you see the bigger picture.
Looking back at the end of the month to see you paid off $300 may not seem like much, but looking back at the end of the year to see you paid off $3,600 is much more satisfying.
Best for: Encouragement for taking care of all forms of debt
12. Don’t fall back into bad habits
Now that you know how to get rid of debt, you want to prevent going backward with bad habits. Regardless of which strategies you use, you have hopefully identified some ways you can improve. By maintaining your good habits, you can stay debt-free in the future, which can also boost your credit.
Best for: Staying on the right track with all forms of debt
How to get out of debt with no money and bad credit
You may be wondering how to get out of debt on a low income, and if this applies to you, fortunately, many of the strategies we’ve listed can work for you as well. Here are some specific strategies we recommend if you’re working with a low income and bad credit.
Research nonprofit financial organizations
There are many nonprofit organizations that offer a variety of financial services for free. Not only can these programs help you find ways to pay off your debt, but they can also help you avoid debt in the future through different strategies. Some of the services they provide can include:
- Debt counseling
- Credit card forgiveness
- Debt consolidation
- Debt management programs
Consider borrowing from friends or family
As you’ve learned, interest can cost you a lot of money, which is why it can be helpful to get a loan from someone you know. You don’t need good credit to borrow from a friend or family member, either. Just make sure that expectations for repayment are set beforehand.
Check your credit report
It’s possible that you have bad credit due to errors that are hurting your credit and preventing you from getting better interest rates. It may also be helpful to familiarize yourself with debt collection laws because some collectors may be over-reaching, or there might be collections on your credit report in error.
Don’t let debt get in the way of good credit
Having debt can hurt your credit if you have a high credit utilization ratio and if you have late or missed payments, which is why it’s helpful to use these different strategies to pay off your debts sooner rather than later. As you pay off your debts, you want to ensure that your payments are reported properly, but sometimes, there are errors that you may be unaware of.
Lexington Law Firm has a team of consultants that can help you address errors that may be affecting your credit. In addition to assisting you with these negative marks, we can also help you protect your credit through continuous credit monitoring and credit education services. To learn more about how we can help, contact us today.
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Source: lexingtonlaw.com