There’s plenty of cookie-cutter financial advice out there on becoming debt-free: Earn more money. Cut up your credit cards. Eat out less. Make coffee at home. Tips like these are obvious, and ultimately, not very helpful. Before you take a pair of scissors to those credit cards, explore these ten realistic strategies on getting out of debt.
In this guide, we’ll explore the following strategies:
- Debt avalanche
- Debt snowball
- Build a budget
- Dedicate unexpected windfalls to your debt
- Meet with a credit counselor
- Negotiate debt settlement
- Consolidate debt with a personal loan
- Transfer debt to a 0% intro credit card
- Use a cash-out refinance to put money toward debt
- Consider bankruptcy (as a last resort)
Plus:
- Which debt should you pay off first?
- Once you’re debt-free: How to stay out of debt
1. Debt avalanche: Pay off your highest-interest debt first
The debt avalanche method involves paying off your debt with the highest interest rate first, then working your way down from there. For example, you might consider paying off debt in this order:
- 25% APR store credit card
- 22% APR rewards credit card
- 7% APR auto loan
- 6% APR student loan
- 5% APR mortgage
With this method, you’re paying less in interest charges over time. You’ll continue making minimum payments on your other debts, and you’ll allocate extra cash toward your priority debt.
2. Debt snowball: Pay off your smallest balance first
Tackle your debt in baby steps using the debt snowball method. You’ll target your debt with the lowest balance first, while making the minimum payment on your other debts. Once your low-balance debt is repaid, you’ll move onto the next lowest debt.
When you’ve finished repaying the first debt, take the amount you were previously paying each month and begin applying it to your next-smallest debt. The amount of money you’re putting toward debt each month won’t change, but you’ll begin paying the debts off with increasing speed.
This repayment method helps you cut down the number of debts you owe and gives you small wins to keep you motivated on your repayment journey. Using the same example above, try the exercise with debt amounts:
- $1,000 rewards credit card debt
- $1,500 store credit card debt
- $10,000 auto loan debt
- $35,000 student loan debt
- $150,000 mortgage debt
Compared to the above example, you’ll notice that this list didn’t change much. That’s because low-interest debts like car payments and a mortgage are paid over a longer period of time than credit cards, which would ideally be paid off monthly.
3. Build a budget to pay off debt
It’s easy to lose control of debt when you’re not tracking your spending. Budgeting is a big part of staying out of debt, but it can also help you pay off debt faster.
Creating a budget gives you a clear idea of how you spend and save your money. Particularly if you have excess credit card debt, budgeting can give you valuable insight into where your income goes each month. Use a budgeting spreadsheet like the one below to track your spending for a month and see where you can allocate more income toward repaying debt.
In addition to a manual budgeting spreadsheet, you can also incorporate one of these budgeting strategies:
- 50/30/20 budget: Split your income into three categories: 50% goes toward needs, 30% goes toward “wants” and 20% goes toward savings and debt repayment.
- Zero-based budget: At the end of the month, your income minus your expenses should equal zero. This helps you account for every dollar earned, including debt repayment and savings.
- Envelope budget: Categorize your spending into virtual “envelopes,” such as food, utilities and housing. Allocate your budget at the beginning of the month to cut down on superfluous spending.
- Minimalist lifestyle: Cut regular but unnecessary expenses, such as dining out or gratuitous shopping trips, to maximize savings. Dedicate any remaining income to debt repayment.
Tip: Utilize an online debt payoff calculator to determine how much you should allocate toward your debt in order to pay it off within a certain time frame. This gives you a clearer image of how much you’ll pay every month and how much you’ll pay in interest in the long run. You can customize your strategy to pay off debt based on how much you can put aside each month.
4. Dedicate unexpected windfalls to your debt
When you receive an unanticipated sum of money, it’s easy to imagine fun ways to spend it: Take a vacation or buy that latest smartphone model you’ve been wanting. But if you’re in a lot of debt, it may be wiser to use your windfall to pay down debt.
Don’t think of a monetary windfall as “extra money” that you can use for discretionary purposes. Use an inheritance, tax refund or work bonus to cut down on your debt and save yourself money on interest in the long run.
Money typically doesn’t just fall into people’s laps, so if you’re anxious to pay off your debts quickly, here are a few ways to earn some extra income.
5. Meet with a credit counselor to form a repayment plan
Nonprofit credit counseling organizations offer low-cost or free debt counseling. A certified credit counselor will:
- Offer money and debt advice
- Help you create a budget
- Give you educational materials on money management
Depending on your circ*mstances, a counselor may put you on a debt management plan, which sets a clear timeline for your debt repayment. Debt management plans come at a cost, typically a monthly fee.
You can find a certified credit counselor by searching the U.S. Department of Justice website.
6. Negotiate debt settlement with your creditors
When unsecured debt becomes too much to handle and you’re delinquent on payments, you may consider negotiating debt settlement with your creditors or a debt collector. Your creditor, like your credit card company, may agree to set you up on a payment plan, reduce your monthly payments or settle your debt for less than what’s owed.
Follow these tips for settling your debt:
- Take notes. Write down the name of the person you spoke with, when you called and what they said. Compile all of this information in a follow-up email.
- Get it in writing. Before you make any payments, get your proposed repayment or debt settlement plan in writing.
- Be honest. Don’t commit to a debt repayment plan if you can’t keep up with the monthly payments. Explain your financial situation to the creditor.
- Check the statute of limitations. If your debt is time-barred, you can’t be sued over it. However, you still owe the debt and it will show up on your credit report.
It’s worth noting, however, that debt settlement can negatively impact your credit score. Be sure you understand the implications before making a final decision.
7. Consolidate debt with a personal loan
A debt consolidation loan can help you repay your debts at a lower interest rate, saving you money over time. This repayment method also allows you to combine multiple debts into one, allowing you to make just one monthly payment instead of multiple payments.
When shopping for a personal loan, you’ll want to find a lender that is willing to give you a lower APR than what you’re currently paying. Keep in mind that the shorter your loan term, the lower your APR may be.
Similarly, you can also consolidate credit card debt by moving it to a balance transfer credit card.
8. Transfer debt to a 0% intro credit card
Another way to consolidate debt is to use a balance transfer credit card. Ideally, you’ll want to find a 0% intro credit card so you can avoid paying interest for the first several months. This way, any payments you make on the card will go directly toward reducing the principal. Keep in mind, however, you’ll typically have to pay a fee when utilizing a balance transfer credit card and once the 0% intro period is over, you’ll have to start paying interest on the remaining balance.
Credit cards and personal loans are both popular ways of consolidating debt. However, these debt repayment options may be out of reach for consumers with subprime credit. You’ll have a hard time securing a good rate on a personal loan with bad credit, and you’ll find it difficult to qualify for a balance-transfer credit card without a good credit score.
If debt consolidation or a balance transfer credit card seems like the right money move for you, compare your options below.
| Personal loans | Balance transfer cards | |
|---|---|---|
| How it works | Repay multiple types of debt by opening a personal loan | Transfer the balance of one or multiple credit cards into a new credit card with better terms |
| Credit required | Varies by lender | Very good |
| Benefits | Fixed APR and monthly payments May offer lower APRs than your current debts Consolidate many types of debt | May be able to pay off debt at 0% APR Get all your credit card statements in one place |
| Risks | Subprime borrowers may not qualify May be subject to origination fees and prepayment penalties APRs vary widely depending on credit score | Any remaining balance will be charged interest when the 0% APR period expires Can only be used to consolidate credit card debt Not all borrowers will qualify |
| Best for… | Borrowers with good credit who have multiple types of debt. | Borrowers with good to excellent credit who can pay off the debt within the intro APR period. |
9. Use a cash-out refinance to put money toward debt
If you own a house, you may be able to use cash-out refinance to pay off debt.
In short, if you have been paying your mortgage, you’ve most likely built equity into your home. A cash-out refinance allows you to borrow against that equity and use the money to do a variety of things, including pay off debt.
In most cases, you’ll only be able to take out up to 80% of your home’s value. For instance, if your home is worth $500,000 and you still owe $250,000, you currently have $250,000 of home equity. Since you’ll typically only be able to utilize 80% of your home’s value, you’ll probably only be able to borrow up to $150,000 of your home’s $250,000 equity value.
Keep in mind that if you go this route, you are using your home as collateral for the debt, meaning you risk losing your home if you default.
10. Consider bankruptcy (as a last resort)
Should you find yourself overwhelmed by your finances, you may be able to discharge your debts by filing for bankruptcy. While this can be a relief for some borrowers, keep in mind that bankruptcy can remain on your credit profile for years and may make it difficult for you to take out credit or a loan afterward. Aside from that, bankruptcy proceedings can take several months or years before your debt is discharged, and some debts are not dischargeable.
Typically, most people file for Chapter 7 or Chapter 13 bankruptcy. In fact, in 2021, there were 399,269 non-business bankruptcies, according to the Administrative Office of the U.S. Courts. Chapter 7 made up 70% of all non-business bankruptcy filings, while Chapter 13 comprised nearly 30% of filings that year.
If you believe bankruptcy may be the best option for you, here are a few of the biggest differences between Chapter 7 and Chapter 13 bankruptcy.
| Chapter 7 | Chapter 13 |
|---|---|
| Once you successfully file, your debts are discharged; however, this may require you to liquidate valuable assets | Once you are approved, you’ll get to keep your assets but you will have to remain on a payment plan for three to five years |
| Chapter 7 bankruptcy can stay on your credit profile for up to 10 years | Chapter 13 bankruptcy can stay on your credit profile for up to seven years |
| There is no capped limit on debt in order to be eligible for Chapter 7 | Cannot have more than $465,275 of unsecured debt or $1,395,875 of secured debt to be eligible |
Which debt should you pay off first?
When deciding how to best tackle your debt, it’s important to become familiar with your financial obligations and which you want to repay first:
- Credit card debt
- Student loan debt
- Auto debt
- Mortgage debt
- Medical debt
- Tax debt
It’s important to take stock of what you owe because some types of debt will open new doors for your debt repayment strategy. For example, you may be able to negotiate medical debt. With mortgage and auto debt, you could consider refinancing. If you have credit card debt across multiple accounts, you could consolidate.
If you’re not sure which debt to pay off first, consider factors like the annual percentage rate (APR). A loan’s APR is a measure of your borrowing cost over a year and takes the interest rate plus fees into account. Consider each debt’s outstanding balance, as well. In general, paying off the debt with the highest APR is your best bet for saving money, especially if you’re locked into your terms and can’t refinance for better terms.
Once you’re debt-free: How to stay out of debt
Becoming debt-free is a difficult task, so it’s important to build better habits going forward so you don’t find yourself in the same situation again. Stay out of debt by monitoring your budget, building your savings and working on increasing your income. Here’s how:
Build your emergency fund
It’s important that you don’t sacrifice your emergency fund or pay off debt. You should always be saving at least some money in an emergency fund. That way, when you’re hit with a big, unexpected expense, you don’t need to resort to taking out debt again.
Many professionals advise that you have between three and six months’ worth of expenses saved up in case of emergency. If that seems like a lot, start small; create your emergency fund by saving up one week’s worth of expenses, then one month, and build from there.
Find a way to increase your income
Paying off debt on a low income is difficult, but staying out of debt when you don’t have a lot of extra cash is even harder. You don’t have to work your body to the bone to find creative ways to pay off debt.
Ask for a raise. It’s common to ask for a raise, so don’t be afraid to ask. Research the average income for your position online, and use that as leverage. Be prepared to advocate for yourself and your accomplishments in your role.
Take a certification course. See if your company will pay for the course, and they may increase your income once you receive your new credentials.
Start a side gig. If you have a car, you could consider working for a ride-sharing service. You could also rent out your home as a vacation rental or participate in paid surveys.
Sell unused items. Bring your old clothes and accessories to a consignment shop to make some quick money. You can also sell home goods, electronics and other clutter on online marketplaces like Nextdoor, Craisglist or Facebook Marketplace.
Utilize a budgeting app
Creating a budget can be hard work, but it’s worth the effort when you’re paying off debt. Even when you’ve repaid all your debt, it’s important to keep budgeting so you don’t slip into old habits.
If you’re having trouble keeping up with a budget in the long term, you should at least download a budget app for your smartphone or on your computer. Budgeting apps can link with your bank accounts to track your spending automatically, so all you have to do is log on to see where your money is going.
Monitor and build your credit score
The credit score system isn’t perfect, but it’s one measure of your overall financial wellness. Plus, lenders and other financial institutions rely on your credit score to determine if you’re a good candidate for a loan or credit card.
In addition, you can request a full copy of your credit report from all three credit bureaus on AnnualCreditReport.com. Doing so won’t affect your credit, and it can give you a better picture of your finances, including:
- Who you owe money to
- How much money you owe
- Your payment history
You can also check your credit score for free with LendingTree Spring.
