“Every time I sat down to pay bills, I felt like I couldn’t breathe. Our debt was so overwhelming. Sometimes it felt like someone had dropped a huge rock on my chest.”
That’s how Vanessa described her state of mind before she and her husband, Anthony, decided to get serious about taking control of their financial future.
Vanessa and Anthony (not their real names) are smart, hard-working people. They both had good jobs in the early years of their marriage, took on what they thought was a reasonable amount of debt, and made a point of paying their bills on time.
In the early 2000s, after the economy bottomed out, Vanessa was laid off, and the couple’s monthly budget got tighter. With less money coming in, they started relying on credit cards and other types of debt to stay current with their monthly bills.
Vanessa eventually found a new job, but even then, the couple’s combined take-home pay wasn’t enough to cover monthly expenses and ballooning credit card bills. With every passing month, they found themselves sinking deeper into a hole of debt.
Though your situation might not be identical to the one Vanessa and Anthony faced, persistent budget shortfalls and mounting debt are all-too-common problems in today’s society. However, overcoming debt doesn’t always have to be an impossible task.
Below are five actionable steps you can take to start tackling your debt head-on.
How to get out of debt: A step-by-step guide
Step 1: Tally up your total debt
When you work with separate balances, it can be hard to comprehend the full extent of your debt issue. Tallying up all of your outstanding bills will give you a clearer picture of how much debt you have so you can develop a sound strategy for moving forward.
To start, write out all of the debts that you currently owe, including credit card balances, short-term loans, and outstanding bills. Then, rank them in order of the amount owed and interest rate charged to get a sense of which debts are putting the biggest strain on your finances.
Step 2: Negotiate lower rates on your most expensive bills
When you are being charged high interest rates, it can severely impact your ability to pay down the amount owed. But it is possible to negotiate the interest rate on credit card debts and bills with some providers.
To do so, call the issuer and ask to be given a lower rate, either temporarily or permanently. Creditors may ask why you are making the request—feel free to express that you are attempting to pay down your debt in earnest and get on back on track financially.
It’s worth noting that having a history of on-time payments will increase your chances of success.
Step 3: Attack debt using the snowball or avalanche method
The snowball method
With this method, you focus on paying off your smallest debts first. To do so, you make the minimum payments on most of your accounts. Then, allocate any excess income toward the bill with the lowest balance.
Once that’s paid off, you’ll focus your efforts on the next smallest balance until all of your debts are gone.
The idea behind the snowball method is that it creates a series of small “wins” at the beginning of your debt journey. As you pay off your smallest bills, it can give you encouragement and incentive to keep working toward becoming debt-free.
The avalanche method
The avalanche method is the opposite of the snowball method. Here, you work toward paying off your largest debt first. Again, you’ll do this by making the minimum payments on all other debts before allocating excess toward your bill with the highest balance.
With the avalanche method, it will probably take you longer to pay off your first bill, but you’ll save on interest over time. As your debts grow smaller, less interest will accrue overall.
Step 4: Consider getting a 0% APR balance transfer card
If you’re dealing with significant credit card debt, another option is to open a 0% APR balance transfer card. This allows you to move your existing credit balances onto one card, so you’ll only have to focus on paying one balance each month.
While most credit card issuers charge a fee for this convenience, it may be worth the cost. Because many of these cards offer an introductory 0% APR period, you’ll get a temporary break from paying mounting interest charges.
Here’s an example of how a balance transfer could work for you:
A credit card balance of $5,000 at a 20% interest rate results in an annual interest expense of $1,000, or about $83 per month. If a credit card issuer offers a promotional interest rate of 0% for an introductory period of 12 months with a balance transfer fee of 3%, the total cost of moving the entire $5,000 is $150. In this case, you would save $408 over the year.
Before opening a balance transfer card, you should determine the following:
- Will the amount you save in interest be higher than the balance transfer fee?
- Will you be able to pay off the balance you’re transferring before the end of the 0% introductory APR period?
One caveat with this method is that you typically need a good credit score to be approved for these cards. If you can’t get approved, you can look into taking out a debt consolidation loan, which will also allow you to merge multiple existing debts into one account. Be aware, however, that these loans come with their own interest rates.
Step 5: Practice a frugal lifestyle
As you work through your debt-free journey, you’ll want to keep your spending in check to prevent more debt from piling up. To do so, try your best to create a budget and stick to it.
One popular budgeting method is the “50/30/20 Rule.” This strategy suggests that you cap your essential living expenses at 50% of your total income. You then allocate 30% of your remaining income to your “wants,” or miscellaneous expenses, and put the final 20% of your income toward saving and paying down debts.
However, if your main goal is to get out of debt, then you might consider putting more money from your “want” budget toward your outstanding balances.
There are plenty of other budgeting methods you can try, too. The key to sticking to one is to find the strategy that works best for you.
The bottom line
Use the steps above as a guide to help you get started on your debt-management journey. With a little hard work and diligence, you can tackle your debts once and for all.
If you’re having trouble meeting your short-term financial needs, then there are other alternatives to paying additional high interest or banking fees. A payday loan requires a one-time upfront fee and can help provide you the stepping stone you need to get back on course.