Last Updated: April 2, 2021
Did you know that an average household in the US has a whopping $135,065 of debt? This is a massive amount you can’t ignore, as it won’t just disappear. Instead, you should learn how to get out of debt. Yes, it’s much easier said than done, but we are here to offer you a helping hand.
Check out our tips on how to break the chains of financial slavery and get rid of debt for good!
How to Get Out of Debt
You’re not the only one who is bothered by arrears — national stats show that the entire country seems to be dealing with too much debt. If you’re looking to take this burden off your shoulders, consider the following steps:
Make a list of all your cards and loans
Way too many people practically live on credit nowadays. The number of credit cardholders and loan borrowers is constantly growing. Using these additional cash streams may be easy, but getting out of debt becomes excruciating over time.
It’s not uncommon for people to get a loan to consolidate their credit card debts, only to end up paying high-interest rates due to late payments. Add an obligatory mortgage plus a student loan to that, and you’ll find yourself wondering how on earth you haven’t traded some of your organs yet.
Joking aside, paying off your debt on time, and getting out of a vicious circle are crucial to avoid getting into more severe obligations. On that account, proper budget planning has a pivotal role in debt reduction.
Supposing that, due to bad credit history, you have a term loan with a higher annual percentage rate (APR), along with a credit card with a somewhat lower APR. Whenever you’re late with your payments, you’ll be charged a fee, and your interest rate will grow. To prevent this from happening, make a suitable debt repayment plan. A list of all your due payments will be a perfect way to begin your journey to a financially secure life.
Sort all your cards, loans, and mortgages by interest rate to determine what you owe most. Start with paying back the lowest bills to avoid accumulation. Over time, your balance will become healthier and you’ll eventually be debt free.
Make an income vs expenses list
The worst thing you can do to your budget is to spend more than you earn. No matter how tempting it may sound, try not to book that trip to Thailand or buy a new car when the old one is still drivable. And do you really need that iPhone 12?
To get out of debt and never slip into it again, you must manage your finances well. The very beginning involves contrasting your income with your costs. Your overall monthly expenses should never exceed your monthly salary.
A debt-to-income (DTI) ratio refers to all your monthly due payments divided by your gross monthly revenue. It’s something that almost all creditors will look into when you apply for a loan. This is just one of their ways to check your creditworthiness. The higher your DTI is, the worse it is for your financial health (a hint: 43% is the maximum you can have to be approved for a loan).
Reducing debts implies resisting wasting money on impulse, among other things. Before you decide to book that holiday, especially if it means maxing up your credit card, calculate whether your budget could endure such expenses. Take a sheet of paper and put everything on the list: how much you earn vs how much you spend every month.
Created by Elizabeth Warren, the 50/30/20 budget rule may help you with debt reduction and your finances’ overall improvement. This is a set of guidelines for planning your budget wisely. Ideally, 50% of your income should be allocated to “needs,” 30% on “wants,” and 20% on your debts or savings.
So, if you earn $6,000, you’ll spend $3,000 on the rent, utilities, and groceries. The next $1,800 you may spend on your hobbies, vacations, or eating out. The remaining $1,200 could be put aside or invested in debt elimination.
Get a debt consolidation loan
Having two, three, or even more credit cards, plus a loan, is never the right way to pay off debt. You may find yourself balancing perfectly in the beginning. At some point, however, you’ll end up with your cards maxed, money wasted on interest rates, and credit score ruined by late payments.
If you’ve ever wondered how to get out of credit card debt, one possible solution is a debt consolidation loan. This is an entirely new loan whose proceeds the borrower uses to reduce debts. Don’t confuse it with debt settlement, as the latter involves hiring a third party to negotiate the amount that your creditors will accept as a replacement for paying off your debts.
With a debt consolidation loan, you’ll be able to pay off debt fast using the funds you’ve just obtained. There are no third parties involved, and the only fee you might pay is an origination fee. Typically, it’s a fixed-rate unsecured personal loan that allows you to not only eliminate debts faster but also save thousands of dollars you’d otherwise spend on interest.
Keep in mind that it’s not only credit cards that you can consolidate. Debt consolidation is among the best ways to get out of debt from your personal, auto, or student loan. Note, however, that it won’t magically lower the money that you owe. With debt consolidation, you have an opportunity to restructure your debt into reasonable monthly payments. The quid pro quo (and the greatest disadvantage) could be a long repayment period or higher interest rates.
Get a balance transfer credit card
Let’s say you’ve enjoyed a shopping spree or a dream journey, and now you struggle to foot the bill. We’ve all been there, thinking about how to get out of debt.
In case you don’t find consolidation that attractive due to the long repayment term, there is another handy alternative — a balance transfer credit card. Now, you may wonder what on earth this is and how it works.
Balance transfer means moving your debt from one credit card to another, typically a new one. If you use it wisely, it could be the best way to pay off debt quickly and effortlessly. There is a tiny catch, though.
All credit cards work in the same manner — you spend, then you pay the minimum amount required when it’s due. If you’re late with your payment, you’ll be charged a range of fees, together with a soaring interest rate. Should you happen to overdraft your card, you’ll get the perfect recipe for a vicious circle of debts.
You may now ask how balance transfer may get you out of debt. Well, it’s simple. You apply for a new credit card, then move your existing debt to that card and pay the minimum payments every month. But to avoid falling into greater debt, watch out for these few things.
Before you even apply for a new card, get familiar with the introductory rate (known as the intro APR). It should be 0% for the initial period, ideally six to 18 months. If it’s not, there is really no point in dumping your current card, as you may pay even greater interest than before. This 0% intro APR is the perfect chance to get rid of credit card debt fast, provided that you repay it during the introductory period.
Another thing to consider is the mandatory balance transfer fee. Given that it may amount to 3%–5% of the debt transferred, it may affect your monthly payments and the overall amount you need to repay.
Yet, your effort to improve your financial situation by becoming debt-free would be pointless if you keep making the same grave mistakes. This time, try not to overuse your credit card. Instead, make some minor purchases with it just to keep it active. Also, don’t miss your payments. Once you do it, you’ll break the agreement and be punished with excessive interest, potentially reaching 29.99%. As a result, you’ll end up paying even more.
Refinance student loans
Did you know that 19% of Americans have student loan debt ranging from $25,000 to $50,000? This percentage equals as many as 8.5 million US citizens wondering how to get out of student loan debt. The solution could be much simpler than you think.
If you hope to get loan forgiveness, forget about it. Some 99% of applicants get rejected. For your debt relief to be approved, you need to belong to a particular category paid through the IBR, PAYE, or ICR plan. Student loan refinance is a much more practical alternative. In addition to helping you get out of your student’s debt, it will be an excellent opportunity to overcome your personal financial problems.
Yes, we’re aware that you might be skeptical and wonder what student loan refinancing has to do with your debt free aspiration. For starters, it will allow you to change your payment plan and decide how quickly you’d like to repay your loan.
Next, it will merge all your payments into a single one. Rather than owing to several lenders, you’ll now make one monthly payment to one creditor. Plus, the new refinance loan will have lower rates than the original one. This further means that monthly payments will be smaller, so you’ll be able to save some money or spend it somewhere else. Most importantly, student loan refinancing will help you improve your total financial picture. Consequently, you’ll boost your budget health and eventually eliminate your debt.
Consider a debt relief service
Are your missed loan or credit card payments getting out of your hand so that you’re receiving collections calls due to unpaid bills? Despair not, as debt relief has got your back.
With this program, you’ll not only be able to get out of debt fast, but you’ll repay less than your original debt. Its offers may range from 10% to 50% of the overall amount you owe. The exact amount depends on the creditor and the offer it chooses to accept. Yet, you shouldn’t take this debt payoff alternative lightly, as it has more cons than pros. It will harm your credit score significantly. Plus, there is no guarantee that you’ll get debt free.
Debt relief or settlement is the process of resolving your crippling debt by promising the lender a large lump-sum payment. Once you sign the agreement to eliminate your credit debt, the settlement company will ask you to stop making payments to your creditors. Instead, you’ll deposit money to the accounts it controls. As you’re no longer paying to your creditors and are falling behind, they will accept even those small amounts.
Such a process of getting rid of debt involves specific risks you need to be aware of. Namely, individuals who desperately seek ways to pay off their debt are easy prey for scammers lurking easy money. So, research the lender thoroughly and make sure that you understand how much you’ll pay in fees, which of your creditors will be paid, and how much.
As one of the simplest ways to reduce credit card debts, you can settle your debts independently. Do what a debt counselor does in the debt management plan they create. Get in touch with them, explain why you’re late, and what you need to recoup. Since almost all creditors have their hardship programs, they won’t hesitate to waive your punishment fees and lower your interest rates.
If you’re unsure which debt relief company to choose, you can try out debt.com — and get matched with the best service for you. Note that the debt.com only works with accredited providers, so you can rely on it without fear you’ll be scammed.
If neither of the listed options works for you and you still don’t know how to get out of debt, there is one solution left — personal bankruptcy. This is the last resort in case you’re not able to pay as agreed in your debt settlement or management plan. It’s also an excellent alternative for all who wonder how to get out of paying debt collectors or are troubled with crushing medical debts.
Though declaring bankruptcy offers an excellent opportunity to have zero debt, it still has adverse and far-reaching consequences. The most severe is long-term damage to your credit score. Namely, it will remain on your record for up to a decade. As a result, it can prevent you from applying to an unsecured or secured loan or increase your insurance rates. As such, it should be the last option to consider when pondering how to get out of debt fast.
There are six types of bankruptcy, each of which is dealt with by federal courts. The two that typically apply to individuals are Chapter 7 and Chapter 13. Chapter 7 bankruptcy, which most individuals use, may help to get you out of debt by eliminating the majority of your unsecured personal loan, credit card, and medical debt. If you qualify, the entire process could be over in three to four months. Bear in mind, however, that it will stay on your credit report for ten years and that you won’t be able to file another bankruptcy in the next eight years.
Chapter 13 bankruptcy is a repayment plan approved by the court that lasts for three to five years based on your income and debt. By this plan, you need to pay off all or a portion of your debts within a given period. A part may be discharged on the condition that you adhere to the plan for the full term. Such a way of becoming debt free may be present on your credit record for seven years.
Given all the negative aftermath, it would be wise to contact your creditors first before filing for bankruptcy. Most likely, they will be willing to negotiate and develop a loan or credit card payoff plan that will suit your current situation.
All the tips for getting out of debt we’ve enlisted in this article will be futile if you don’t take responsibility for your obligations and, ultimately, change your money mindset. Make sure you don’t spend more than you earn, cut your household expenses if possible, create a budget plan to get out of debt, and stick to it.
In the long run, your sacrifices will pay off as you’ll manage to save some money and improve your financial situation. Most importantly, you won’t find yourself desperate and wondering how to get out of debt ever again.