It’s always on your mind. You toss and turn at night thinking about it and your days are filled with worry because you fear you’ll never break free from bondage. This “thing” that’s holding your mind captive and causing ridiculous amounts of stress: debt.
And here’s the worst part: you desperately want to get out of debt, but you’re living check to check, have more bills than money, or find it impossible to save for whatever reason. And with the debt payments in the mix, it’s hard to see the light at the end of the tunnel because you have no idea where to start to remedy the problem.
Sound familiar? The good news is it’s not impossible to get out of debt. Even if you’re living check to check with little to no money in the bank, there are steps you can take to start paying down those debt balances and find the relief you need. Read on to learn more.
A Step-By-Step Process
Step 1: Change Your Mindset
It’s tempting to cut right to the chase and start crunching numbers, but there’s an integral first step that many often miss: adjusting their mindset. Without reframing your thoughts on your current financial situation, you’ll find yourself running in circles and never truly making progress.
Why so? If all you do is complain about your debt load instead of focusing on moving forward and identifying solutions, you’ll be more inclined to throw in the towel on your debt payoff efforts. But if you commit to the cause and vow to see things through to the finish line without constantly complaining but instead focusing on how nice life will be once the balances are gone, you’ll more than likely stay the course and do whatever it takes to reach the finish line.
Are you ready to go all-in? If so, move on to the next step. Otherwise, take some time to work on your mindset to give yourself the best chance at successfully getting out of debt sooner than later.
Step 2: Conduct an Inventory of Your Debts
Now that you’ve decided to commit 100 percent to the cause, it’s time to conduct an inventory of your debts. If you’ve never taken the time out to add up all your outstanding debt balances out of fear of how much you owe, now’s the time to face your fears head-on. And it’s simple to do so. All you’ll need is a blank sheet of paper or you can open a spreadsheet on your computer. (The latter may be best to better track your progress over time and make updates as needed). Create a section for revolving (i.e. credit card) and installment debts (i.e. mortgage and auto loans). Note key details about each balance in a chart like the one listed below:
| Creditor’s Name and Contact Information | Type of Debt (Revolving or Installment) | Current Balance | Credit Line (if applicable) | Minimum Payment | Due Date | Interest Rate | Status (Current or delinquent) |
Step 3: Create a Debt-Payoff Fund
Another integral mistake that most make when attempting to pay off debt is setting a goal with no idea of how to accomplish it. Simply put, they decide they want to pay off the debt by a certain date without having the funds or strategy in place to make their goal a reality.
But you’re not going to go down that road. Instead, you’ll create a debt-payoff fund to start hammering away at those balances each month along with a strategy that works best for your financial situation. More on the latter shortly.
Wondering where the money is going to come from, particularly if you’re already strapped for cash. You have two options:
- Trim your spending. Take a look at your budget and cut costs ruthlessly to free up funds. If you don’t have a budget, check out this guide to get started.
- Explore ways to earn more. Does your job offer overtime? Take advantage as much as you can. And if you have even more free time, pick up a part-time job or side gig. But it’s a must you allocate all the extra proceeds to your debt-payoff fund.
If possible, get more disciplined with your spending while boosting your income. That way, you’ll give yourself the best possible chance of getting out of debt in record time, and you’ll position yourself to build a solid financial foundation and knock other financial goals out of the park even once you’re out of debt. Most importantly, keep in mind that this is short-term pain for long-term gain.
Step 4: Get Current on All Past Due Debts
When you conducted an inventory of your debts, were any of the accounts delinquent? If so, you want to get current on those before you move forward with tackling the other debt balances? Why so? Once they reach 120 days past due, the creditor may charge-off the account and report it to the credit bureaus, which does substantial damage to your credit rating and could result in other legal repercussions later on down the line.
Step 5: Decide on a Debt-Payoff Strategy
Now that you know how much extra you can afford to throw at debt each month, the next step is to decide on a strategy. Two popular strategies that work with practically any type of debt are:
- The debt snowball: tackle the debt with the lowest balance first
- The debt avalanche: tackle the debt with the highest balance or interest rate first
Quick Note: Regardless of which strategy you choose, always make the minimum payment on all your debts first to keep the accounts in good standing.
Wondering where to start? Most individuals attack credit card balances before installment debt because they’re more costly over time. Once you’ve decided on a strategy, increase the monthly payments in your budget to correspond with the plan and weave the debt-payoff fund proceeds into your income.
Other Tips by Debt Type
Credit Cards
Have you tried reaching out to the credit card issuer to inquire about a lower interest rate? If your credit score has improved since you applied, you may qualify for a more competitive APR.
Credit card companies also offer hardship programs to consumers facing financial difficulties. They may be willing to suspend payments or freeze your interest for a set period, which will enable you to get back on track and hit the ground running with your debt payoff efforts.
Another option to consider is debt consolidation, which rolls are your balances into a single loan product. But it only makes sense if you’ll qualify for a substantially lower interest rate to help curb the cost of interest. Furthermore, you should refrain from using the cards once they’re paid off by loan or you could find yourself buried in an even larger mountain of debt.
Balance transfer credit cards are also an option if you can be disciplined and keep your spending in check. Also, it’s wise to only transfer the amount you can afford to pay off during the promotional period or you could find yourself paying even more interest than before. Check out this guide for more tips on how to ax credit card debt.
Student Loans
Ask your lender if they’ll accept principal-only payments without assessing any penalties. If so, exercise your option to do so when making extra payments to minimize the interest you’ll pay over the life of the loan. Also, consider consolidating your student loans if you’ll qualify for a more affordable interest rate, and ask the lender if they’ll offer a reduction in your interest rate by enrolling in automatic payments.
Medical Debt
Medical bills are sometimes negotiable, so it doesn’t hurt to consult with the medical provider if you’re struggling with exorbitant bills. They may be able to reduce your outstanding obligation or find outside assistance.
Other Installment Loans
Consider accelerating repayment efforts on your installment loans by paying biweekly, rounding up, or doubling up your payments. Refinancing could also save you a bundle by lowering your interest rate. But keep in mind that doing so gives the lender more time to collect additional interest from you since they’ll be resetting the loan term even though the monthly payment is lower. So it’s best to keep making the higher payments and use refinancing as an opportunity to avoid paying a ton of interest.
Other Useful Tips When Paying Down Debts
Don’t Ignore Lenders or Creditors
It’s much better to be proactive than reactive when dealing with debt. If you’re at the point where you’re staying afloat, continue to pound away at those pesky debts until you reach the light at the end of the tunnel. But if you can’t keep up and the calls are flooding in, it doesn’t hurt to chat with the lender or creditor to see if there’s something they can do to assist instead of doing nothing and letting the account go to collections.
Use Financial Windfalls Wisely
Consider allocating financial windfalls, or any unexpected cash that comes your way, to your debt-payoff fund. Even if it’s not much money, keep in mind that every little bit counts and can help you reach your goal faster.
Dealing with Debt Collectors
Do you have debts that have been charged-off or are currently in collections? Chances are debt collectors may be contacting you daily in hopes of reaching a resolution with you. While you may be tempted to focus on paying them off to get the debt collectors off your back, it may make more sense to seek professional assistance before handing over your hard-earned cash.
But in the meantime, you should know your rights and report any abuse to the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), or Attorney General’s Office in your respective state.
For example, if a debt collector reaches out before 8 am or after 9 pm, they are in direct violation of your rights. They also cannot harass you over the phone or call your job if you ask that they stop. And if you send over a Cease and Desist Letter to halt all contact, they can only reach out one more time to communicate how they plan to move forward.
The Bottom Line
At last! You’ve devised a plan of action and it’s time to execute. As you move forward with your journey, remember to work your debt-payoff strategy into your budget each month. And in those times when you want to give up, remember why you started and keep pressing on until you reach your ultimate goal of paying your debts in full.