:max_bytes(150000):strip_icc():format(jpeg)/digging-out-of-debt_final-b14f7e15866443b3a3b87745ea178ef8.png)
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 challenging 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.
Key Takeaways
- High debt levels can lead to lower credit scores, which can make it more difficult to obtain financial products or certain jobs.
- Consider paying down your credit cards with the highest interest rates first or paying off your smallest debt first.
- Look for ways to reduce your expenses and put the money you save toward your debt.
- Student loan forgiveness programs and income-based repayment programs can help with student loans.
- Consult with a professional credit counselor about your options for your situation, or find a debt relief company to negotiate with lenders for a reduced amount of debt.
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 to fully understand your monthly debt and the interest you are paying on each debt.
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 adding extra money to your debts, consider 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 that tackling the smallest debt first works better 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 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.
Important
If you own a home and have equity, you may be able to use a home equity line of credit (HELOC) to pay off higher-interest debt. Lines of credit have significantly lower rates than credit cards.
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 increase the overall rate at which your debt declines and reduce 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.
Warning
Try to avoid closing your credit cards. Closing cards reduces the overall amount of credit available to you and increases your credit utilization ratio, both of which can hurt your credit score.
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 who 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.
Investopedia / Ellen Lindner
How Can You Get Out of Debt and Save Money?
You can get out of debt and save at the same time, but you must budget and plan. First, always pay at least the minimum required payments on your credit cards and loans. Then, allot extra money toward paying down more debt and saving according to your goals. A debt consolidation loan or a balance transfer credit card can also help lower overall interest payments.
How Can You Get Out of Real Estate Debt?
If your mortgage debt is too high, there are a few steps you can take to help lower it. First, you may be able to refinance your mortgage for a lower percentage rate, depending on market conditions and what you can get approved for. You can also make extra payments toward the principal on your mortgage loan, which will reduce the length of your loan and lower your interest costs.
How Can You Get Out of Student Debt?
If you have multiple student loans, consider refinancing your loans into one payment with a lower interest rate. Research loan forgiveness programs if you have a federal student loan. It is difficult to include student debt in a bankruptcy filing, so your federal student loans may be discharged, or released, if that occurs.
Is Credit Counseling Free?
The cost of credit or debt counseling varies depending on individual counselors and state laws. For counselors who belong to the National Foundation for Credit Counseling, for example, the majority of these services are provided at no or low cost to clients.
The Bottom Line
If you can’t get out of debt, you may have to declare bankruptcy, which can ruin your credit rating and make you ineligible for loans or credit for years. Consider all your options carefully and weigh their pros and cons. Consult a professional financial advisor for more specific guidance on your options for getting out of debt, including a possible debt management plan, for your situation.
