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Finding yourself deep in debt can be overwhelming. The good news is, getting out of debt is possible—it just takes a little time.
While some debt can be unavoidable—such as a mortgage or car loan—you can and should deal with other unnecessary debt that's causing stress. Once you formulate a plan and stick to it, you could find yourself debt-free and armed with the knowledge to stay that way.
Follow these steps to help you get out of debt, remain debt-free in the future and build good credit for the long haul.
1. List Everything You Owe
To pay off your debt, you need to know exactly how much you owe:
- Make a list of all your debts. Include your mortgage, vehicle loans, student loans, other types of loans, accounts in collection and credit cards.
- For loans, note your interest rate and monthly payment.
- For credit cards, note your interest rate and the minimum monthly payment.
Add your monthly loan payments and minimum credit card payments to determine the minimum amount you owe each month.
If you're unsure of all the accounts you have open, especially those that might be in collections, you can check your free credit report. It will show what creditors are currently reporting to the credit bureaus, including your most recently reported balances and contact information for the accounts. (Your banks and credit card issuers will have the most up-to-date information.)
The total you come up with is the minimum amount you need to pay every month simply to stay current on your debt. However, if that's all you pay toward your debt on a monthly basis, it will be nearly impossible to pay it all off.
2. Decide How Much You Can Pay Each Month
Once you've listed out your current debts, make another list that includes all your non-debt monthly expenses, such as groceries, cell phone bill, utilities, gas for your car, rent, entertainment, clothing and so on.
Some of these amounts can vary from month to month, so it's a good idea to take the average of several months. For example, to find out your average monthly electricity payment, add up the total from six months' worth of bills and then divide the sum by six. That's your average monthly electricity cost for the past six months.
This list represents basic expenses that you have to pay every month. Now compare this amount with your monthly income, considering only the money you have left after paying taxes and other salary withholdings—your take-home pay or monthly net income. Subtract these total expenses from your monthly income.
If the amount you have left over after paying these necessary bills is less than the amount you need to put toward your debt, you'll need to take action. You may choose to:
- Look for opportunities to save. Reconsider your expenses and consider ways to spend less. For example, if you dine out a lot, cutting back could save money that you could put toward paying off debt.
- Consider debt consolidation. A debt consolidation loan allows you to compile multiple high interest debts, such as credit card balances, into a single lower interest debt. While debt consolidation can't lower the principal of what you owe, it can reduce the total amount of interest you'll pay over the life of the debt. Reducing interest expenses may make it easier for you to put more money toward paying down the principal of the debt.
- Increase your income. This will give you more money to put toward your debt. You might get a second job, sell some things you don't need or look for a job that pays more.
If the amount left over after paying basic expenses is more than the minimum amount you need to put toward your debt, decide how much additional money you would like to set aside to pay down your debt each month. Remember, the more you can pay above the minimum, the faster you'll be able to pay off your debt.
3. Reduce Your Interest Rates
High interest rates can cause your debt to grow rapidly, especially if you have a lot of credit card debt. When you're paying a lot in interest, it can be difficult to pay off the principal.
Here are some common types of higher interest debt and tips for how to reduce the interest you pay on each:
You have a few options for reducing credit card interest rates:
- Ask the credit card issuer for a lower rate. If you have a good payment history with them and good credit, they may agree to lower your rate for a period of time, or even permanently. Calling your issuer and asking for a lower interest rate costs you nothing and doesn't affect your credit report or credit score.
- Consider a balance transfer credit card. If you're not able to secure a lower interest rate from your current credit card company, you may be able to transfer outstanding credit card balances to a balance transfer card with a lower or zero interest rate. Credit card companies often offer promotional rates for a limited period in exchange for you transferring a balance from an existing card to a new one. You'll need to meet the balance transfer card company's qualifications, and you'll probably need to pay a transfer fee of around 3 percent of the balance you're transferring.
- Look into a debt consolidation loan. This option can be another way to lower your interest rates because loans of this type typically charge lower interest than credit cards.
While certain types of student loans can have fairly low interest rates, if your student loans are older, your rates may be higher. Additionally, if you have a high principal, the interest can quickly add up.
Depending on your income and the type of student loan you have, you may be able to apply for an income-driven repayment plan on StudentLoan.gov that will lower your monthly payment. You must be current on your student loan debt to qualify, but you could reduce your monthly payment without incurring a penalty or harming your credit score.
You may also be able to obtain a debt consolidation loan if you have more than one student loan. Consolidating multiple student loans, which you can also apply for through StudentLoan.gov, will allow you to have a single monthly payment at a fixed interest rate that's based on the average of the interest rates on the loans you're consolidating. There's no cost to consolidate multiple federal education loans into one loan. However, you may lose certain student loan benefits, such as the ability to defer repayment.
You may also apply for a debt consolidation loan from a bank or other financial institution that combines your student loans and other debt, such as credit card debt. If you go this route, however, you may lose student loan benefits, such as the ability to defer repayment.
If you're looking for help dealing with high interest rates and difficult-to-manage debt, you may wonder if debt settlement is a good option for you. Some debt settlement companies advertise that they will negotiate with lenders on your behalf to get your payments reduced. With debt settlement, you go through a third-party company to pay your creditors a lump sum, usually an amount less than the total you owe, to settle the debt. While debt settlement may make it easier for you to pay off your debt, it does have some significant credit consequences.
Whenever you pay less than the full amount you owe—which you agreed to pay when you entered into a credit agreement with the lender or credit card company—the settlement appears as negative information on your credit report. Negative information can contribute to lower credit scores.
Instead of diving into debt settlement, a better option might be to talk to a nonprofit credit counselor. Credit counseling organizations can help you better understand tactics for managing and reducing your debt, such as creating and following a budget, and they may help you avoid the negative impact of debt settlement
Credit counseling organizations also offer debt management plans, which are typically for those deep in debt. A debt management plan can reduce the number of payments you have to remember each month. A credit counselor from a government-approved list will negotiate with your creditors to see if they'll accept reduced interest rates or monthly payments, waive fees or reduce the amount you owe. Then you pay the credit counseling agency once a month and the organization distributes the funds to your creditors per their agreement. If you enroll in a debt management plan, it could appear on your credit report. For more, see "A Debt Management Plan: Is It Right for You?"
4. Pay Your Bills on Time Each Month
Paying all your bills on time every month is one of the single best things you can do for your credit. Take any steps necessary to ensure you remember to pay your bills. You can set up automatic payments or payment reminders through your bank to ensure you never miss a payment.
If you find you're having trouble juggling all your bills and keeping up with payments, a debt consolidation loan or a debt management plan, mentioned above, could help. But you don't need professional help to create your own plan for managing debt. There are multiple ways to pay down debt, including:
- Put extra money toward the debt with the highest interest rate. In the long run, this will reduce the total amount of interest you pay.
- Put extra money toward the credit card or debt with the smallest balance. You'll be able to pay it off quickly, reducing the total number of accounts you have to deal with and giving yourself the mental boost of successfully eliminating part of your debt (though you'll pay more interest in the long run than if you were to pay off debt with the highest interest rate first).
- Deal with any debts in collections. Bringing collection accounts current can help reduce their negative impact on your credit, which is a good reason to put it at the top of your to-do list. Plus, reducing calls from debt collectors can help relieve some of the stress of being in debt.
5. Be Diligent Moving Forward
As you work to pay down your current debts, it's important not to undermine your hard work by taking on any new debt. Avoid the temptation to use a personal loan or balance transfer card to consolidate credit card debt unless you're extremely diligent about not using the card once you've paid off the balance, or only charge what you know you can pay off every month.
Each time you successfully pay off a debt, put the extra money you freed up toward paying off more of your other debts. In months where you make more money than anticipated, or your expenses are less than expected, make the extra money work harder for you by putting it toward additional payments on your debt.
What if You Still Need Help?
Sometimes debt is just too much and you may fear you'll never be able to repay everything you owe. You do have some last resort options, such as getting a debt management plan or declaring bankruptcy.
Declaring bankruptcy is one of the most harmful circumstances for your credit, and it should only be a last resort. Depending on the type of bankruptcy you declare, the negative information will remain on your credit report for seven to 10 years. You may either have all your debts eliminated or have to agree to a plan to repay at least part of your debt.
If your debt management plan isn't working and you're thinking about declaring bankruptcy, you might first consider getting a debt consolidation loan to help streamline your payments and lower your interest rates. Check out these Experian partner loans offering debt consolidation loans with competitive annual percentage rates (APRs).
With Best Egg, you can get a loan for up to $35,000 that you can use to consolidate your other debt. If offers the possibility of a low—5.99%—interest rate depending on your creditworthiness. You can easily apply for a Best Egg loan online. If approved, you can receive your funds in as little as one day.
With LendingClub, you can borrow up to $40,000 with an APR of 6.95% to 35.89% depending on your creditworthiness. LendingClub can tell you which interest rate you may qualify for without generating a hard inquiry on your credit report. And if you need money quickly, LendingClub can fund loans in as little as three days.
Prosper accepts applicants with a FICO® Score* of 640 or above and offers fixed interest rates ranging from 6.95% to 35.99%, depending on your creditworthiness. If you qualify for a loan with low interest, you could borrow up to $40,000 and use it to consolidate your current balances, streamlining your payments and saving you money on interest. Prosper has a simple online application process and allows you to find out your interest rate without your credit scores being affected.
Once you've reduced or even eliminated your debt, you can begin rebuilding your credit by practicing good credit and financial management. Pay all your bills on time, and avoid carrying credit card balances from month to month. To keep track of your credit going forward, you can check your credit reports and scores for free with Experian or enroll in ongoing credit monitoring.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.