For many reasons – convenience of online shopping, improved marketing, new and innovative products, subscriptions, and more – it’s easy to find yourself taking on new forms of debt. Knowing that you’re getting in too deep and then getting out, is not always quite so simple.
Being financially savvy and learning how to handle various types of debt can allow you to be able to comfortably achieve your financial goals and make some fun purchases along the way.
If you do find yourself in too much debt, you need to first understand what your debts are and how they play into your overall financial situation. Then, you can explore different ways to avoid debt and reduce what you have. And once you’ve done that, you’ll be armed with the knowledge and experience to avoid falling into excessive debt in the future.
Understanding Your Debt
The only way to get out of debt in the most cost effective way possible and stay out of it is to thoroughly understand your debts and how you got there in the first place.
Why are you in debt?
Not necessarily just what your debts are, but why? Be honest with yourself. It could be excessive spending with credit cards, deciding to finance a car that’s outside of your budget, or costly life events that you simply couldn’t anticipate.
This doesn’t mean you did anything wrong per se, but recognizing how you got into debt will help you avoid it in the future.
Analyze Your Financial Situation
Next, you need to take a fresh look at your financial situation. Before you explore ways of reducing and avoiding debt, you need to know what you’re working with. This by no means is an exhaustive list, but here are some things to keep in mind.
- Review your budget. Don’t have one? Make one.
- Map out all sources of income
- Be aware of all deductions including taxes, insurance, investments, and direct deposit locations
- Outline all of your regular expenses – identify needs vs. wants
- Calculate your debt-to-income ratio
- Account for any known upcoming changes to your financial situation
12 Ways to Get Out of Debt Fast & Effectively
Getting out of debt fast is great. Getting out of debt the right way that’s most cost effective and financially responsible is better. There are many tips, techniques, and methods to get out of debt.
Now that you know your debts and financial situation, you’ll be able to tell which ways of getting out of debt will work best for you and get rid of your debt quickly.
Proactive Ways of Avoiding Falling Too Deep into Debt
- Consult your budget before taking on new debts
Always ensure that you can afford something you plan to finance, put on a credit card, or otherwise go into debt for. Planning to figure it out later when you’re not sure how something fits into your budget can lead to a world of financial troubles. - Pay more than the minimum required payment
During your budgeting process, try to pay more on your debts than the minimum amount owed. Prioritize putting any extra cash toward the most expensive debts with the highest interest rates. Paying off debts early will reduce the amount of total interest you pay, which can amount to a lot of money. - Refinance or negotiate APR with creditors
Securing the lowest interest rates possible is where you can save a lot of money on your debts – money that can go towards paying down the principle of other debts and get rid of them faster. If you find yourself in a situation where you can refinance to lower your APR, it’s a great thing to consider. You may also be able to contact creditors to negotiate a lower interest rate in some cases. - Earn more money
Of course, one way to pay off your debts faster is to have more money to put toward them. This may not always be an immediate option, but consider inquiring about a raise, start a side gig, or explore options for passive income sources. If you are able to increase your income, it’s important to keep yourself in check to avoid increasing your spending (and therefore your debts) along with it. - Reduce your expenses
The inverse of additional income – see if there is an opportunity for you to cut expenses. If you don’t regularly review your transaction history from debit or credit cards, try to get in the habit of it. And if you spend a lot in cash, keep track of your spending. You might be surprised by how much money you spend on things that you don’t consider necessary. If there are subscriptions, fees, or bad habits that you can eliminate, all of that money can go toward repaying other debts. - Try different budgeting styles and adapt
There are many different ways to create and manage a personal budget. You’ll likely have to explore a few to identify what system works best for you and continue to evolve it over time. An efficient budget is crucial in paying off existing debts effectively and avoiding getting back into too much debt in the future. - Identify and avoid expensive habits
You may identify expensive habits or hobbies when reviewing your transaction history. A great example of this is a daily coffee from a café. If this is an established habit that costs you $5 a day, 5 days a week – that amounts to $1,300 per year. You can make a coffee to go for a LOT less.
Strategies for Debt Relief When Debt Becomes Unmanageable
- Try the debt snowball method
The debt snowball method is where you prioritize paying off your debts starting with the account carrying the smallest balance. Reducing the number of accounts in debt can feel accomplishing and motivating, like checking something off your to-do list! While this isn’t always the most cost effective method for debt repayment, it can give some people the little push they need. - Consolidate debts with a personal loan
If you have several accounts with high interest rates, it can become very costly over time. A common method to simplify debts across many accounts and reduce total interest paid is to take out a personal loan to repay your existing debts. Often you can secure a personal loan with a lower interest rate and pay towards that single debt rather than the other accounts that it is used to pay off. The caveat of course, is getting approved for a personal loan with the rate and terms you’re looking for. - Balance transfers
Using a balance transfer as a means of debt relief is not for the weak-willed. A balance transfer involves opening a new line of credit and transferring the balance from another account. As a way to attract new customers, banks will offer low or 0% interest for a time on these accounts. Some of the obvious dangers here are the temptation to increase spending, fees for the balance transfers, and difficulty getting approved. - Negotiate debt settlements
Debt settlement programs are usually handled via a third party that negotiates with your creditors to accept a single lump sum payment that is less than your overall debt. The advantage for them is that they get the money immediately and the advantage for you is that you pay less overall. However, this means that you need to have a large amount of cash to “settle” the debt, which isn’t always feasible. Additionally, there are many cautions you must take with debt settlement companies to avoid debt settlement scams, hurting your ability to manage multiple debts, and damaging your credit. - Debt relief programs
Other debt relief programs such as debt management plans, or DMPs, will consist of credit counseling and working with a specialist to help you get your finances back on track. With any program like these, beware of scams and excessive fees.
Getting Rid of Different Kinds Of Debt
Different kinds of debt require different reactions and techniques than others. In any case, being proactive and planning your finances is the right answer. But if you’re already in debt, you can treat them differently to pay them off faster and more effectively.
Getting Out of Student Loan Debt
The biggest thing with student loan debt is being proactive.
Before you take out that loan → Try to get as many scholarships as you can, apply for grants, and reduce the total amount you’ll need to borrow. Think through what you want to accomplish in school and with your degree so you have a clear path forward. This of course can change, but having a plan will make your decisions more intentional.
While you’re in school → Look for relevant experience in the field you are studying. Whether this is something you can do DIY, with an internship, or someone you know – relevant experience will help you start your career better and faster, allowing you to get a jump start on paying off those loans.
After school → Prioritize your student loans within your budget and ensure you’ll be able to keep up with repaying them before taking on any new debt.
Getting Out of Credit Card Debt
Credit card debt can be handled a little differently, as this is a form of revolving credit that has a fluctuating balance, rather than installment credit that chips away at a total amount.
If you start noticing red flags for too much credit card debt, don’t wait. Take action and revisit your budget and spending habits. Try to avoid using your credit accounts for any non-essential purchases.
If you have multiple credit accounts, prioritize repaying the most expensive debts first. These are the accounts with higher interest rates that will end up costing you more money in the long run.
In the event that the credit card debt becomes too unmanageable and you’re stuck with high interest rates, you could consider a debt consolidation loan. However, this should be a last resort after attempting to resolve these debts on your own.
Managing Debt Based on Your Financial Situation
Everyone has a unique financial situation, and handling debt is no exception to this. Two common concerns when it comes to resolving debts are income level and credit health.
How to Get Out of Debt with Low Income
If you have a lower income, repaying debts can be very challenging while keeping up on essentials and bills. This is especially true if your income has decreased after taking on debts.
When battling debt with a lower income, here are some quick tips.
- Try the debt snowball method
The debt snowball method is where you prioritize paying off your debts starting with the account carrying the smallest balance. Reducing the number of accounts in debt can feel accomplishing and motivating, like checking something off your to-do list! While this isn’t always the most cost effective method for debt repayment, it can give some people the little push they need. - Consolidate debts with a personal loan
If you have several accounts with high interest rates, it can become very costly over time. A common method to simplify debts across many accounts and reduce total interest paid is to take out a personal loan to repay your existing debts. Often you can secure a personal loan with a lower interest rate and pay towards that single debt rather than the other accounts that it is used to pay off. The caveat of course, is getting approved for a personal loan with the rate and terms you’re looking for. - Balance transfers
Using a balance transfer as a means of debt relief is not for the weak-willed. A balance transfer involves opening a new line of credit and transferring the balance from another account. As a way to attract new customers, banks will offer low or 0% interest for a time on these accounts. Some of the obvious dangers here are the temptation to increase spending, fees for the balance transfers, and difficulty getting approved. - Negotiate debt settlements
Debt settlement programs are usually handled via a third party that negotiates with your creditors to accept a single lump sum payment that is less than your overall debt. The advantage for them is that they get the money immediately and the advantage for you is that you pay less overall. However, this means that you need to have a large amount of cash to “settle” the debt, which isn’t always feasible. Additionally, there are many cautions you must take with debt settlement companies to avoid debt settlement scams, hurting your ability to manage multiple debts, and damaging your credit. - Debt relief programs
Other debt relief programs such as debt management plans, or DMPs, will consist of credit counseling and working with a specialist to help you get your finances back on track. With any program like these, beware of scams and excessive fees.
How to Get Out of Debt with Bad Credit
If your income isn’t necessarily the issue but you have bad credit, methods such as debt consolidation loans or balance transfers may not be available. Getting yourself out of debt with bad credit and improving it along the way is more about changing your mindset and habits.
- Focus on avoiding new debts and consult your budget to ensure you can afford any purchases.
- Be sure to maintain a positive payment history, making at least the minimum required payment on time across all accounts.
- Reduce spending on credit to reduce your credit utilization.
- Review your budget to identify opportunities for reducing expenses on credit such as subscriptions.
How to Stay Out of Debt Once Its Cleared
Getting out of debt is one thing, but staying out of debt is the real goal. Throughout your debt relief process, be sure to reflect and be honest with yourself.
Recognize and change bad habits to avoid falling into the same temptation that put you in debt initially. If your debt was due to unfortunate and unanticipated circumstances, this may shift your focus to be more about preparation with things like an emergency fund.
We’ll leave you with a short list of things to keep in mind to help keep debts manageable.
- Say no to unnecessary expenses
- Consult the budget
- Focus on what’s practical
- Negotiate rates and terms where you can
- Continue learning and becoming more financially savvy