How to Get Out of Debt

Pay More Than the Minimum

The majority of us don’t calculate the length of time it takes to pay off credit card debt or how much we are actually paying in interest by the time the debt is paid in full. An ideal way to reduce your principal fast is to pay more money than the minimum payment. Even adding an extra $5, $10, or more each month will save you a ton of money in interest charges.

According to Experian’s 2019 Consumer Credit Review, the average household carries at least four credit cards—and they all have balances. Each dollar you pay over the minimum required will allow you to pay your debt off quicker.

Consolidate Your Credit Card Balances

If you are dealing with credit card debt, you might look into balance transfers. However, before you determine if you want to consolidate your credit card balances, first create a list of all of your credit cards. It doesn’t need to be a fancy or complicated list. Instead, you just need to write down your balance, credit limit, minimum payment and interest rate for each credit card.

It’s not uncommon to be surprised by the wide range of interest rates. If you are like many people, you probably have been focusing more attention on the balances and payment amounts when looking at your credit card statements, than your interest rates. Nevertheless, the interest rate is very important to review because high interest rates can lengthen the time it takes to pay off the debt, not to mention increasing the total amount you will pay over time. If you have only been making your minimum monthly payments, then it is especially important to pay attention to the interest rates.

After you have compiled your list, decide whether you should move the balances of credit cards that charge higher interest rates to cards that charge lower interest rates. Before taking that action though, find out if any of the credit accounts offer zero-percent interest (or very low rates) on balance transfers. Be sure to familiarize yourself with the details of these low teaser rates and when they will increase. Additionally, you need to find out if there is a fee to transfer the balances to the lower-rate card. Consider consolidating the balances if you’ll save money overall, taking into account interest payments and transfer fees.

Use this calculator to help you determine how much you could save by transferring your balances.

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Even if you don’t have a zero-percent interest rate, it may still be a good idea to transfer balances on your higher-rate cards to your lower-rate cards. Once you move the balances over, you should make one large payment each month that is at least equal to the total amounts you were paying monthly on the cards you transferred. However, always try to pay more than the minimum payment every month. Since you will be making payments at a lower interest rate, you will be able to pay off the debt faster and save money on interest.

For this tactic to work successfully, do not charge anything else on the higher-rate account as tempting as it might be.

Take the Avalanche or Snowball Approach

There are other approaches to help pay off your debt, including the snowball and avalanche method. With the snowball method, you pay off your lowest balances first. For example, you would take the list of credit balances you created and put them in order from highest balance to lowest balance.  The quickest way to feel as though you have accomplished something when paying off your debt is to pay off the lower balances first. Then take the money you have been paying on the lowest balance and add it to the next credit card balance. You continue doing this until all the credit cards balances are paid.

The avalanche method focuses on paying off your balances with the highest interest rates first and therefore can potentially save you money on interest when compared to the snowball approach. With this method, you prioritize the debt from highest interest rate to lowest interest rate. You would then start with paying down the debt with the highest interest rate and then work your way down.  After each credit card balance is paid in full, the minimum payment you were making on that card should be applied to the next credit card to be paid off.

Keep in mind that experts have different opinions on what approach to take when paying off credit card balances. Pick the route that works best for you and helps you become successful in getting rid of that debt.

Pay Down Your Mortgage

There is a way to reduce the amount of time it takes to pay off your mortgage without having to greatly increase your budget. You can do so by creating a bi-weekly payment schedule. Making regular biweekly payments typically equals one extra payment or more a year and can save hundreds of thousands of dollars over the loan term, not to mention that it can shorten a 30-year loan to approximately 23 years. You have to be consistent with the payments, though.

Below is a bi-weekly repayment calculator that will show you how much you can shorten your mortgage repayment term and the amount of interest savings.

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Another option to pay down your mortgage faster is to calculate how much extra you need to add to your monthly payment to get that one extra payment a year. For example, if your monthly payment is $1,200 per month, and you divide that payment by 12 months, it would total $100 per month. Simply include that additional $100 every month as a payment toward your principal. This technique will have the same effect as the biweekly payment—totaling one extra payment per year.

After your credit cards are paid off, add the money you were paying monthly on those accounts to your house payment. Be sure to write on your payment stub that the additional amount is to be applied to the principal. If you pay your mortgage payment online, you should see the option that allows you to add extra money toward the principal.

Withdrawal From Savings (Maybe)

You might be wondering if you should use your savings to pay off debts. The answer is not the same for everyone and you should proceed with caution. In some situations, it could make sense. For instance, if you are earning a three-percent interest, and you’re paying 18 percent interest or more on your debts, you’re losing money. You should always keep an emergency fund, but you might want to use the remaining money to pay down your debt.

The following calculator provides a debt payoff versus savings summary, which can help you determine the most appropriate action for your financial situation.

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Track Spending

If overspending was the culprit in racking up debt, now that you are debt-free take the step to control your spending. To help you track your day-to-day expenditures, keep a spending journal. In your journal, make a list of purchase categories, such as restaurants, entertainment, clothing, coffee, toiletries, gasoline and groceries. For 30 days, list what you spend in the applicable category. At the end of 30 days, total what you spent in each category and then add up all the categories for a grand total. There will likely be some areas that surprise you—maybe you didn’t know you were spending that much in that category. This journal will help you identify where you can cut back and avoid overspending. Just by tracking your daily cash and credit expenditures, you will find ways to cut back on spending, save money and avoid future debt problems.

Build Your Savings

Having sufficient savings can help you avoid falling into debt if an unforeseen event happens, such as a drop in income or major medical expense. Ideally, you should have the amount equal to at least three to six months of living expenses saved. If you are married and both are working, the amount to aim for is three months. If you are single or a one-income household, the goal should be six months. That way, if an emergency arises, you will not need to turn to your credit accounts to cover your costs. If three to six months of living expenses is not possible right now, then make it a priority to save at least $1,000 as an emergency fund. To save this amount over 12 months, you would need to set aside $83.33 a month.