How to Get Out of Debt

How to pay off debt is not rocket science, but it is hard work. Here are 10 of the best get out of debt strategies.

How to Pay off Debt Faster

There’s sobering news regarding the use of credit cards by American consumers. The problems with overspending persist. The 2016 Survey of Consumer Finances by the U.S. Federal Reserve, said that 38.1% of all American households carry some sort of credit card debt, averaging $16,048. The total household debt in the U.S. is $12.6 trillion and there’s a revolving debt (credit cards) load of $929 billion. Households with the lowest net worth (zero or negative) have an average of $10,308 in credit card debt.

If you’re seeking to erase your balance by making the minimum payment each month, you might want to rethink that plan. It can take years — if not decades to get down to zero debt.

The Federal Reserve offers several common-sense strategies. Paying on time helps you avoid late fees and penalty interest rates. Staying below your credit limit also prevents fees and the increase to a higher interest rate. There are also ways to avoid unnecessary fees — such as taking cash advances — and it often helps to read your credit card agreement so you aren’t caught off-guard.

  1. Stop Using Your Credit Cards
  2. List All of Your Debts
  3. Lower Your Interest Rates
  4. Make a Budget
  5. Pay Ahead Each Month
  6. Double Up on Payments
  7. Use Your Imagination

Think of it like losing weight. You don’t take off 30 pounds in a weekend. It’s two pounds here, another pound there. It’s consistency. It’s developing a plan, employing some discipline and being persistent. It may sound dreary, but it can be fun. Creativity is encouraged.

Cut Credit Card Usage

1. Stop Using Your Credit Cards

This is as much psychological as it is practical. It’s very easy to stay in the trap of pulling out the plastic to take care of anything. That must stop immediately. Every time you swipe, it makes the hole even deeper. “I remember consulting with a couple and they said their situation was doing fine,’’ said financial planner Ric Edelman, a best-selling financial author and host of a nationally syndicated radio show. “I found they owned $50,000 on their credit cards and I said, ‘Tell me why you feel you’re fine.’ The wife said, ‘We’re able to make the payments every month.’ She meant the minimum payment. That kind of thinking must change for someone to get their debt under control.’’

List Your Debt

2. List All Of Your Debts

You can get a copy of your credit report at That report will name everyone you owe. List the total debt owed to each creditor along with the interest rate. Include the monthly minimum payment.

Some financial advisers recommend paying off the smallest debts first, since it builds momentum and motivation. But mathematically, it makes more sense to attack debts with higher interest rates.

Lower Interest Rate

3. Lower Your Interest Rates

Many creditors have leniency programs for job loss, medical emergencies, death or extended illness in the family, etc. If you’ve experienced a financial hardship, contact the creditor to see if you qualify for a lower interest rate.

If you don’t want to deal with them, consider working with a nonprofit credit counseling agency, which can devise a debt-management plan that could provide lower interest rates.

Student loan debt has skyrocketed to $1.3 trillion. If you’re still paying for your diploma, new online lenders such as Earnest, SoFi and Upstart might be able to refinance with lower interest rates.

Consolidating debt can also lower your interest rate. Explore getting a home equity loan or line of credit. I got a $25,000 home equity loan with a 3.5%  interest rate to pay off $18,000 in credit card debt, and my monthly payment on the total bill dropped $100.

You should also consider transferring your debt to another credit card offering 0% interest. But read the fine print. The 0% rate usually jumps significantly after 6-12 months, so be sure you can pay off the debt in that time frame. And calculate the initial transfer fee to make sure you’ll be saving money.

Make a Budget

4. Make a Budget

It seems basic, but this is where the discipline starts. There’s a difference between needs and wants. And that likely means cutting out trips to the upscale coffee shop, while eliminating eating out at lunch. It’s a difficult concept. The latest data from the U.S. Bureau of Labor Statistics says that eating away from home accelerated from 6.2% to 7.9% in 2014-15. “Everything is a push to buy, a push to consume,’’ George Washington University professor Annamaria Lusardi said. “We need to make saving as exciting as consumption. It gives us the capacity to reach our dreams, to make decisions and do the things we like.’’

Pay Extra On Bills

5. Pay Ahead Each Month

Pay as much as you can afford to eliminate your credit card debt. If you worked overtime, saved some cash on your grocery bill with coupons or came into some extra funds, use it to pay down your debt even faster. It’s a smart use of money and it’s a great habit. On a $120,000 mortgage at a 4.5% interest rate, making a 13th monthly payment (instead of just 12 per year) will save $16,000 in interest. Adding $100 to your monthly payment will save near $28,000 in interest.

Pay Extra On Bills

6. Double Up on Payments

If you pay off one credit card, immediately allocate those funds to paying off the next one. OK, allow yourself a little treat if you must, but overall, this is a task that requires focus, not breaks.

Imagine Money and how to save

7. Use Your Imagination

After cutting your spending, look for ways to increase the revenue streams. This doesn’t have to be a miserable exercise. Find some things you enjoy or ways to utilize your talents. Ever considered being a dog-walker or pet-sitter? You could become a secret shopper. Maybe you could barter with someone, exchanging a service for some merchandise. It all adds up. And if you give this a try, it could be fun.

How Should You Pay off Multiple Credit Cards?

Credit card debt is one of the biggest financial problems for American consumers. According to the 2016 Survey of Consumer Finances by the U.S. Federal Reserve, 38.1% of all American households carry some sort of credit card debt, averaging $16,048.

Now imaging being tapped out on three credit cards.

Or five.

Or 10.

The Consumer Financial Protection Bureau says the average American consumer has slightly fewer than four credit cards.

Here are some strategies about how to dig your way out of multiple credit card debt:

  • Balance Transfer

    It’s paying off the balances on existing cards or loans by transferring them to another credit card account, usually with a much more favorable interest rate (sometimes 0%). To take full advantage, you must pay off the full balance transfer amount before the balance transfer period ends. Also check on the policy for new purchases with the new card (it could attract a higher interest rate than the balance transfer agreement).

  • Close Each Credit Card Account As You Pay It Off

    When clearing the debt on each card — a monumental moment each time, no doubt — be sure to close the account by contacting the provider. Even if you no longer use the card, fees could still apply if the account isn’t closed properly.

  • Attack the Highest Interest Rate or the Smallest Balance, Your Choice

    Depending on your preference, first attack the credit card with the highest interest rate (debt wrecking ball method) or lowest balance (debt snowball method). If you go high, make minimum payments on low-interest rate cards until you have eliminated the one with the highest. If you go low, utilize the same strategy: minimum payments on everything but the lowest balance, until you pay that one off. Whether you’re slicing through the highest interest rate or shedding cards at a higher frequency, it’s psychologically satisfying. Try to stop using all but one credit card and only use that one for emergencies.

  • Debt Snowball vs. Debt Avalanche, which is better?

    The Debt Snowball plan recommends paying off credit cards and loans with the lowest balances first. The Debt Avalanche tells you to pay off accounts with the highest interest rates first.

    Mathematically, the Debt Avalanche is better because the higher interest rates accrue and compound interest faster, which increases your overall debt.

    However, it’s only better if the consumer keeps going until all the debts are wiped out. Studies have found many consumers lack that motivation. By first tackling the smaller debts, consumers build momentum to follow through and attack larger ones.

    A 2015 Texas A&M research paper published in the Journal of Marketing Research found that dividing tasks into smaller parts and completing them from the smallest to largest size increases the likelihood of completing the overall task. This behavioral theory backs the Debt Snowball.

    So if motivation is not a problem, the Debt Avalanche is better. If it is a problem, the Debt Snowball is better.

  • Keep Up The Repayments

    Pay as much as you can each month to reduce interest. Even if it’s just the minimum payment, be timely to avoid late payment or default fees.

  • Lower Your Credit Card Limit

    If you keep one credit care for emergencies and online payments, be sure to lower the credit limit on it to an amount you can repay within three months. A good limit is $2,000 or so.

  • Get Some Help

    If there are mounting problems, with your credit report potentially jeopardized, it’s best to contact your credit provider to reach a revised repayment plan. It might also be useful to contact a nonprofit credit counseling agency. They can help with a plan to eradicate your debt.