Holding too much debt can cause financial hardship in several ways. You may struggle to pay your bills, or your credit score could suffer, making it more difficult to qualify for future loans like mortgages or auto loans.
If you're carrying a significant amount of debt, you can take several steps to reduce it quickly and get on a healthy financial path.
How To Get Out of Debt
Debt can include mortgages, student loans, credit cards, and other types of personal debt. Carrying too much debt can be stressful. Getting out of debt can put you in better financial health and open more opportunities.
1. Understand Your Debt
Review all your loan statements and bills and fully understand how much debt you owe each month as well as how much interest you are paying on the different debts.
Ensure that your monthly debt obligations and necessary expenses are below your income. If you can't afford to pay your essential bills, you will need to take steps like negotiating with lenders or securing more income.
2. Plan a Repayment Strategy
Instead of just putting extra money toward any of your debt, think about which debt you want to pay down first.
Targeting high-interest debt first using the avalanche method will save you the most money in the long run. However, some people find tackling the smallest amount of debt first works better for them because it keeps them motivated.
3. Understand Your Credit History
Check your credit rating and review your credit report for inaccuracies. You can get one free from each of the three credit bureaus (Experian, Equifax, and TransUnion) or from AnnualCreditReport.com. You are entitled to your free credit report at least once per year.
Your credit report can help you understand how your debt is affecting your credit score. You can see if you have a significant number of late payments or if you have a high credit utilization ratio, meaning you use a large amount of the debt available to you.
4. Make Adjustments to Debt
If your credit rating allows for it, try to get a larger, lower-interest loan and consolidate your debts into this loan. This can speed up the process of paying off your debt by minimizing the interest.
You may consider a balance transfer offer of 0% interest from one of your credit cards. This way, you can get a grace period from that could last anywhere from six to 18 months, depending on the offer. Be aware that if you don't pay the balance off in full before the offer term ends, you will pay the credit card's interest rate on the balance.
5. Increase Payments
Whenever possible, double the amount of payments you make to your debt, especially for high-interest debt. Paying more than the minimum can speed up the time it takes to get out of debt.
By increasing your payment amount, you will be increasing the overall rate at which your debt declines and reducing the total interest you pay.
6. Reduce Expenses
Cutting back on unnecessary expenses is a key part of getting out of debt. Review your regular expenses and identify which are necessary, such as food, housing, and utilities, and which are unnecessary, such as entertainment or new clothing.
Reducing your unnecessary expenses can give you extra money to put toward getting out of debt.
7. Consult a Professional Financial Advisor
Meeting with a credit counselor or financial advisor can help you understand all your options for getting out of debt. Professional advisors can guide you through the best strategies for your particular situation.
A credit counselor also may provide support when you meet with your creditors. However, be wary of credit specialists that charge high fees.
8. Negotiate with Lenders
If you are still struggling to pay your debt with your income, you can take other measures. If you are behind on your payments, you can try debt settlement with the help of a reputable debt relief company.
With this strategy, you negotiate with lenders to reduce the amount of debt you owe in exchange for agreeing to pay a portion of your balance. However, one drawback to turning to debt settlement is that it can negatively affect your credit score for several years.
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