There’s no doubt about it: being in debt can be stressful. When your unpaid bills are accumulating and the interest you owe on your credit cards keeps growing, trying to make ends meet – let alone saving for the future – can feel overwhelming.
It’s not easy to get out of debt, especially if you have a lot of high-interest or high-balance loans, but it can be done! Here’s what you should know as you begin your journey to become debt-free.
Assess the Damage
Before you start making a plan for how to get out of debt, you have to figure out exactly how much you actually owe. Collect all your recurring monthly bills and tally up the totals, along with the outstanding balance and interest rate for each one. With the numbers right in front of you in black and white, you’ll know exactly what you’re dealing with. Once you’re organized, you can pick which debt repayment strategy to start using.
Figure Out Why
It’s also important to spend some time thinking about how or why you got into debt in the first place. Perhaps the loan payments for your home or car are making it hard to afford your other financial obligations. Maybe your income isn’t increasing as quickly as you hoped it would after college, making it hard to pay off your student loans.
If you find that most of your debts are related to shopping sprees or other unnecessary spending, you’ll need to find ways to curb this wasteful spending. Are you making too many impulse purchases or eating out too often? Do you have a problem with online shopping, or a more serious issue like a gambling addiction? It’s important to address these factors – seeking outside help if necessary, such as from a reputable credit counseling service – to make sure that once you get out of debt, you stay out of debt.
Choose Your Debt Reduction Strategy
When it comes to paying off debt, there are two popular approaches: the debt snowball method and the debt avalanche (or high-interest rate) method.
With the debt snowball method, you pay off the debt with the lowest balance first, regardless of what the interest rate is. This is achieved by making minimum payments on all your debts except the one you are trying to pay off—that debt gets the minimum payment, plus any extra amount you can afford, applied to it each month until it is paid off. Then, the funds you freed up by paying off your smallest debt are applied to the next-smallest debt, and so on, creating a “snowball effect” as more and more of your monthly income becomes available for debt repayment.
The advantage of this method is that typically it doesn’t take very long to pay off the smallest debt, but the sense of achievement is a powerful motivator to encourage you to build on your momentum and continue paying off your other debts one by one.
The debt avalanche method, on the other hand, focuses on paying off the debt with the highest interest rate first, even if it has a lower outstanding balance than your other debts. This strategy is more financially efficient, because it will save you more money on interest. However, because it may take longer to pay off the first debt you are focusing on, it may take a bit more discipline. You won’t get the same psychological “boost” that you would by using the debt snowball method.
No matter which debt reduction strategy you choose, remember to focus on not adding any more debt to your personal balance sheet. That means living within your means and using online money management tools to help you follow a budget, so you don’t have to rely on credit cards to cover any gaps. In addition, if your income increases, whether due to a raise at work or a side hustle, you should plan to direct all extra funds to paying off your debts until you achieve your goal of being debt-free.
Why Does Debt Management Matter?
If you currently pay the minimum amounts on all your loans and credit card bills each month with no problem, you may be wondering if these tips apply to you. The answer is, absolutely! Even if you are able to meet all of your financial obligations, there are still advantages to paying off your debts quicker.
f you only make the minimum payment required for your credit card, it will take you much, much longer to pay off the balance—and that’s assuming you don’t continue using the card and racking up even more charges! Paying more than the minimum balance will help you get out of debt much faster, and will also save you a significant amount of interest over time.
In addition, owing a lot of money to different creditors can negatively affect your credit score and increase your debt-to-income (DTI) ratio, both of which are evaluated by lenders. So if you have a high DTI due to large credit card balances or outstanding student loans, it may be more difficult for you to get a mortgage loan and the most affordable interest rate.
Refinance or Consolidate Your Debt
If you need to lower your monthly loan payments or want to save money on interest, explore your options. You may find a solution that’s right for your situation. For example, many borrowers with federal student loans have taken advantage of income-driven repayment plans to help them manage their student loan payments.
Similarly, if you have a large credit card balance, or multiple cards with varying amounts owed, you can look into a consolidation loan. This type of personal loan allows you to pay off your high-interest credit card debts with a lower interest rate, simplifying your finances by combining multiple debts into one—with one competitive interest rate and monthly payment. However, if you choose to obtain a loan to pay off your unsecured debts, it’s essential that you don’t add to your debt load. Continuing to charge unnecessary items will make it that much harder to reach your goal of getting out of debt.
If you’re currently making car payments and your credit is good, refinancing your auto loan for a better rate and term could be another great option.
We Can Help
As a member-owned financial institution, BluPeak Credit Union is committed to helping our members achieve their financial goals. We’re proud to offer access to a financial wellness program offering free webinars and online courses on many different financial topics, as well as access to confidential credit counseling services through GreenPath Financial Wellness.
Must meet membership and account criteria. All loans subject to credit approval and program guidelines. This information is provided for educational purposes only and is not intended to be financial advice.