How to Get Out of Debt in 6 steps

If you’re wondering how to get out of debt, you’re not alone. Around 64 million Americans have some form of debt. And it’s not just credit card debt keeping people up at night. According to the credit-reporting agency Experian, Americans’ consumer debt adds up to more than $16 trillion (Q2 2023). 

While each individual’s circumstances vary, trends show that, on average, Gen Zers hold the least amount of non-mortgage debt, while Gen Xers shoulder the highest burden of non-mortgage debt. Within non-mortgage debt, Gen X along with Millenials carry the majority of student loans.

Debt’s effect on your life

You may have heard references to “good debt” and “bad debt.” Generally speaking, things that may have a long-term positive impact on your financial health are considered “good debt.” That includes student loans, which may increase your long-term earning potential, and mortgages, which can add to your net worth if your home rises in value over time. When people refer to “bad debt,” they often mean things like money you owe on credit cards or an auto loan: purchases that depreciate in value. 

There’s no shame in being in debt, whether it’s the “good” or “bad” type. The difficulty is that carrying debt over time can have a negative effect on your life in a number of ways, such as:

• Cash flow: Monthly debt payments can eat into the money you have available to spend each month. If your minimum payments are particularly high, it can even be difficult to budget for necessities. 
• Credit score: Having a lot of debt or late payments can lower your credit score, making it more difficult to be approved for a loan or line of credit if you need one. Some employers even look at applicants’ credit scores as part of their hiring process. 
• Saving for the future: Every dollar you spend on debt payments and interest is money you can’t put into savings and investments that could help you work toward your long-term goals or save for retirement.
• Risk of falling behind: Even if you have only “good debt,” it can turn bad if you fall behind on payments. Late payments can lower your credit score and result in fees and increased interest rates; it can also be difficult to catch up later.
• Stress: Worrying about debt and finances can take a toll on your mental health as well as your financial well-being. The American Psychological Association reports that 65% of Americans cite money and personal finance concerns as a significant source of stress.   

But the good news is that you can counter the negative effects by learning how to get out of debt, making a plan that works for you, and taking steps now to start your journey toward debt-free living. 

How to pay off your debts faster

Paying off debt takes planning and discipline, but there are techniques you can use to succeed. Depending on the amount you owe and your current financial position, it may take you a longer or shorter amount of time to pay off your debt than another borrower. But regardless of your situation, the sooner you start figuring out how to get out of debt, the sooner you’ll be able to put the money you spend on interest back in your own pocket.

These six tips can help you make a plan and start taking action now:

1. Stop borrowing money 
2. List all your debts
3. Make a budget
4. Negotiate your interest rates
5. Use a debt repayment method
6. Put extra money toward monthly payments

1. Stop borrowing money

Don’t continue to accumulate debt. It may sound obvious, but your spending habits can allow additional debt to creep into your life, sometimes unwittingly. 

You may wish to take a look at how you use credit cards first. Remember that a line of credit is really a type of loan, and you’re paying interest on the money you borrow each time you whip out your card to make a purchase. By using your debit card instead of your credit card, you’ll only be able to spend the money you have in the bank. This may entail reducing spending on non-essential items in your budget, like entertainment. 

Another sneaky way more debt can accumulate is if you routinely use credit cards to earn points or rewards. If you pay off your credit card balance every month, before interest can accumulate, you won’t add to your debt. But it’s easy to spend more than you’d planned and wind up with additional debt if you can’t pay off the full balance when it’s due. 

Review all your auto-payments to see which ones are being charged to credit cards, and switch them to your debit card instead. That way, you won’t be adding to your credit card debt without realizing it. This is also a good opportunity to check for monthly or annual subscriptions you’ve signed up for but are no longer using; it’s easy to start a free trial and forget to cancel it.

Finally, avoid accruing additional debt in the form of loans. If you need to borrow money to make a larger purchase, like a new car or home improvements, consider whether you can delay those purchases to save the needed amount.

2. Gather your debts

To plan how to get out of debt, you’ll need a clear picture of exactly how much you owe. Make a list of all of your debts, including student or auto loans, credit card debt, your mortgage, and any purchases you’ve made on installment plans. Track the amount you owe, the interest rate, and your minimum monthly payment for each debt. Having the complete picture will help you better understand how much you’re actually paying toward your debt each month, and whether you’re able to contribute more toward debt that carries a higher interest rate.  

To ensure you track down all your debts, you might want to take a look at:

• your bank account statements for the last year
• your credit card statements
• records in digital payment apps
• your credit report; you can get a free copy of your credit report without negatively impacting your credit score 

3. Adopt a budget that you can stick to

Creating a budget and regularly tracking your spending is a cornerstone of planning how to get out of debt and managing your money to put that plan into action. When you have a budget, you can see exactly how much money you’re bringing in, plan how to spend it, and track where it’s going. You decide what’s essential and what’s optional, giving you the power to make decisions that help you reach your debt-free goals. 

Making a budget is the first step; sticking to it is another matter. Luckily, there are many different budgeting approaches, and you can choose one that fits best with your lifestyle. 

50/30/20 budget

The 50/30/20 model is a popular approach because it provides clear guidelines for allocating your money. With this method, you divide your spending into needs, wants, and savings/debt, then allocate your after-tax earnings to each category.

• 50% to needs: Things you need for survival, like groceries, utilities, minimum loan payments, insurance, and health care
• 30% to wants: Things you want to make life more enjoyable, such as dining out, vacations, entertainment, and just-for-fun purchases
• 20% savings/debt: Savings, investing, and/or making additional payments on your credit card debt and other loans

4. Negotiate and reduce your interest rates

There may be options to reduce your interest rates for some of your debts. The more you’re paying in interest, the longer it’s likely to take to wipe out your debt, so it might be worthwhile to investigate your options.

• Credit card debt consolidation: You might be able to transfer your balance from one or more credit cards to a card with a lower interest rate. Keep in mind that you must be in good standing with your credit card payments and be able to qualify for the new lower-interest card, and there are often fees when you transfer a balance. 
  • Note: Be careful when accepting 0% interest offers for an introductory period. These offers may seem like a good idea to reduce your interest however sometimes they may backdate the interest to the beginning date of the loan if not paid in full before the introductory period expires. In this case, you would not have saved interest and you would have paid a transfer fee. It’s important to understand the terms and conditions.
• Credit card interest rate reductions: Some credit card companies have programs for reducing your interest rate. Some issuers might reduce your rate if you have a history of on-time payments or are facing financial hardship. Others have programs designed especially for people whose debt has become unmanageable. 
• Student loan options: Your student loan issuer may have a variety of options for reducing your interest rates, including debt consolidation if you have multiple loans and deferment if you’re facing financial hardship. There are also a variety of federal programs you may qualify for.  
• Other loan options: Any loan issuer might offer programs or be willing to negotiate a lower interest rate, so it’s worth calling to ask.
• Overall debt consolidation: If you have multiple debts, you may wish to research debt consolidation loans. With these programs, the financial institution provides a loan to pay off all your other debts, and then you pay off that single loan. If you go this route, make sure the interest rate on the loan is lower than the rate of all your other debt.  

Be aware that any debt consolidation or interest-rate reduction programs may have fees associated with them, so do the math to ensure any fees don’t outweigh the savings you’ll get by reducing your interest rate. 

5. Tackle your debts with the snowball method

When you have multiple debts, it may feel overwhelming. One approach that can have a big impact is to start small and work your way up: that’s the debt snowball method in a nutshell. Many people find this strategy effective and encouraging when they start their get-out-of-debt journey. 

Here’s how it works: Take your list of debts and organize them by the total amount you owe, from smallest to largest. Every month, make the minimum payment on each account. Then, pay extra on the smallest debt every month. When that’s paid in full, shift all the money you were paying toward that debt to the next largest one, and continue paying the minimum on everything else. 

Here’s a hypothetical example of how it could work in practice. Pat has the following debts:

• Store credit card: $500 balance, $25 minimum payment per month
• Major credit card: $1,200 balance, $65 minimum payment per month
• Car loan: $5,000 balance, $130 minimum payment per month
• Student loan: $15,000 balance, $190 minimum payment per month

Pat pays the minimum payment for all those loans each month, plus an extra $100 toward the store credit card. When the store credit card is paid off, Pat starts paying an extra $125 a month on the major credit card; that’s the total of the store credit card’s $25 minimum payment plus the extra $100. 

One reason this method is so effective is that you gain a sense of accomplishment each time you completely pay off a debt. And the amount you can put toward paying off debt gets bigger and bigger as you go along, just like rolling up a snowball. This method works well if you have debts that are relatively small (less than $3,000 each) or interest rates that are not excessively high (large credit card balances with interest rates above 10% would be considered excessive).

Try the avalanche method for high interest debts

The snowball method isn’t the only approach you could take. People who have some debts with especially high interest rates might want to try the avalanche method, in which you pay extra on the debts with the highest interest rates first. While the easiest method for getting out of debt depends on your situation, what matters is choosing a strategy that works best for you.

6. Pay more than your required minimum payment

The consequences of making only the minimum payment on your debts each month can add up quickly. Say, for example, you have $5,000 in credit card debt, with a minimum payment of $125 and an 18% interest rate. If you only make the minimum payment each month, it will take you nearly four years to pay off your debt, and you’ll spend a total of $2,013.21 in interest. If you up your payment to $300 per month, you’d accrue around $800 in interest and pay off your debt in less than two years. 

Even if you have a fairly low interest rate, the longer you have debt, the more you spend on interest. Putting extra money toward your monthly payment will help you get rid of debt faster, and you’ll pay less in interest as well. 

Your debt-free future

If credit card and loan payments are straining your budget, the tips above can help ease the burden, no matter how small you start. Even if you have relatively little debt now, making a plan for how to get out of debt may be a smart move so that you don’t wind up further in the hole. 

Whether you have “good debt” or “bad debt,” paying it off sooner rather than later can help you build a stronger financial future. When you get rid of debt, you can put the money you were spending on loan payments and interest into savings and investments that may earn profit over time. The institutions that hold your debt are making money from those loans; imagine how much better it would feel to have that money earning interest and returns for you instead.  

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Debt payment FAQ

What is the easiest way to get out of debt?

It depends on your circumstances and personal preferences for managing money. Both the snowball method and the avalanche method can be helpful strategies. Creating and sticking to a budget can help you put more money toward paying off debt and avoid going into more debt in the future. 

What can I do if I can’t pay my debt?

When what you owe is more than you afford to pay back, you can look for ways to reduce your payments by contacting lenders. Depending on the type of debt and the financial institution, you might have options that will reduce your monthly payments or interest rate, or even get a forbearance that pauses your payments for a period of time. 

You can also look into refinancing options for your mortgage or student loans if current interest rates are less than what you’re paying. A similar tactic can be used for credit card debt by transferring your balance to a card with a lower interest rate.

Some people also find that debt consolidation services can help. Institutions that offer a debt consolidation loan sometimes also negotiate with creditors on your behalf to reduce the balance of your debt.

Finally, you might also consider picking up a side hustle to earn extra income that you devote solely to paying off debt.

Can you remove debt without paying?

Generally speaking, once you have debt, you have to pay it off. Even if you declare bankruptcy, you’ll generally have to sell some of your assets to pay back as much of the debt as possible before the rest of the debt is discharged. And certain kinds of debt, like student loans and child support, cannot be discharged through bankruptcy.

That said, there are a few government programs for student loan forgiveness that apply to certain individuals and circumstances.