Debt can be a difficult thing to manage. Between monthly bills and saving for unexpected expenses, it can be hard to stay on top of your payments. But making only the minimum payments to your creditors puts you at risk of falling into debt, which could take months or even years to get out of.
There are many different ways to get out of debt, and you don’t have to sacrifice your happiness to do it. You can adjust your budget and free up funds to pay more than the minimum on your debts each month, or you can refinance your accounts using a debt consolidation loan or balance transfer card. Another viable strategy is adopting the debt snowball method or using financial windfalls to eliminate your balances faster. Or, as a last resort, you can settle your debts for less than what you owe. The right strategy for you depends on your unique situation and financial goals.
Average Debt Per Person
Debt is a burden faced by many Americans. On average, each American owed $96,371 in 2021. This debt can take various forms, such as mortgages, credit card balances, auto loans, personal loans, and student loans.
Here’s how it breaks down by generation:
| Age group | Average debt load |
|---|---|
| Gen Z (18-24) | $20,803 |
| Millennials (25-40) | $100,906 |
| Gen X (41-56) | $146,164 |
| Baby boomers (57-75) | $95,607 |
| Silent generation (76+) | $39,859 |
6 Strategies To Get Out Of Debt
Now that you’re ready to get out of debt, follow these steps and you’ll be on your way.
1. Pay More Than The Minimum
Debt can be a huge burden, both financially and emotionally. It can feel like you’re never going to get out from under the weight of it all. But there is hope! You can get out of debt by making some simple changes to your budget and lifestyle.
One of the most important things you can do to get out of debt is to pay more than the minimum payment each month. This will save you money on interest and help you get out of debt faster. For example, let’s say you have a $15,000 balance on a credit card with a 17 percent APR and a $450 minimum payment. Making only the minimum payment would take almost four years to repay the balance, and you would end up paying about $5,500 in total interest. However, by increasing your monthly payment to $550
Why this works: The faster you pay off your credit card debt, the less you’ll pay in interest.
How to start: Be sure to make your extra payment before the due date of your current billing cycle. You can also add it to your monthly minimum payment amount.
2. Try The Debt Snowball Method
The debt snowball method is a great way to pay off your debts quickly. With this method, you make the minimum payment on all of your debts except for the smallest one. You then pay as much as you can on the smallest debt until it is paid off. Once that debt is paid off, you move on to the next smallest debt and continue making minimum payments on the rest.
The debt snowball method involves paying off your debts in order of smallest to largest balance. So, in the scenario above, you would focus on paying off the $1,000 auto loan first, then the $5,000 credit card balance, and finally the $10,000 in student loans.
Debt can be a difficult thing to manage and can often feel like it’s snowballing out of control. One method that can help you focus on paying off debt one at a time is called the debt snowball method. This can help you stay motivated and on track while also building momentum. However, there are some types of loans, like payday loans or title loans, that have much higher interest rates (between 300 and 400 percent APR on average)
Why this works: The debt snowball method is a great way to get your finances under control. You’ll see progress quickly, which will motivate you to keep going.
How to start: Assuming you have more than one outstanding debt, the best way to pay them off is to rank your debts from smallest to largest balance. You should continue making minimum payments on all debts, but also allocate any extra money towards the debt with the lowest balance until it is paid in full.
3. Refinance Your Debt
Debt consolidation and refinancing can be a great way to save money on interest and repay debt faster. By consolidating your debts into one loan with a lower interest rate, you can save hundreds of dollars in interest charges. You can also refinance your mortgage, auto loan, personal loan, and student loan to lower your monthly payments and pay off debt faster.
One way to consolidate your debts is through a debt consolidation loan, which may come with a lower interest rate than your existing debts. Another option is to transfer your credit card debt to a balance transfer card that offers 0% APR for a specific time frame, usually six to 18 months.
Why this works: Refinancing can help you save money on your monthly payments and pay off your loan faster. By getting a lower interest rate, you can reduce the amount of interest you pay over the life of the loan.
How to start: When it comes to debt, there are a few different consolidation options available. By doing some research, you can figure out which one will work best for your particular situation. Once you’ve decided on a method, get preapproved for a loan or balance transfer card so that you can get the best rate possible.
4. Commit Windfalls To Debt
Your tax refund or stimulus check is like free money that can help you get ahead financially. Use it to pay down your debts instead of letting it sit in your bank account or blowing it on unnecessary things. You could even split the money 50-50 between debt and savings, so you’re getting closer to financial freedom while still having some fun.
Inheritances, work bonuses, and cash gifts can all be used to pay down debts faster than you may have thought possible. Every little bit helps when working towards your debt-payoff goals.
Why this works: Saving money from financial windfalls can help speed up the process of paying off debt.
How to start: Start by allocating the funds you have available, and then apply that amount to your outstanding debt balances. Doing so promptly will help to avoid any temptation to overspend.
5. Settle Your Debt For Less
There are several ways to deal with your debts, including negotiating a settlement with your creditors. This can often be done for a much lower amount than what is owed. While it is possible to do this on your own, many companies offer debt settlement services for a fee.
There are some risks associated with debt settlement that you should be aware of, according to the Federal Trade Commission. For example, some debt settlement companies may ask you to stop making payments on your debts during negotiations, which could hurt your credit score.
Why this works: Creditors will only receive a fraction of what is owed to them and the rest is forgiven. This way, you can move forward without the burden of owing anyone anything.
How to start: Debt settlement can be a great way to get out of debt, but it’s important to do your research and make sure you’re getting the best deal possible.
6. Re-examine Your Budget
The best way to pay off your debts is to earn more money. You can do this by picking up a part-time job or side hustle. Alternatively, you can adjust your budget to spend less money each month.
Organize your spending plan by importance, with needs in one category and wants in another. This will help you see where you can reduce or eliminate expenses. Make the necessary adjustments to your budget, and use the freed money to pay extra on your monthly debts.
Why this works: Making some short-term financial sacrifices can help free up funds to pay down your balances faster.
How to start: Assessing your spending plan is the first step to determining where you can make cuts. By allocating funds specifically for debt payoff, you can make extra payments each month and become debt-free sooner.
How Debt Can Negatively Impact Your Life
Debt can be a major obstacle in your life, preventing you from achieving your goals. It can make it more difficult to get loans and can lead to higher borrowing costs. Debt can also make it harder to get your dream job.
Debt-To-Income Ratio
Debt-to-income ratio is an important factor when qualifying for loan products. A high debt-to-income ratio may make it more difficult to qualify for a loan. For example, most lenders require a debt-to-income ratio of 43 percent or less to qualify for a mortgage loan.
Your DTI, or debt-to-income ratio, is an important factor in determining how much you can afford to spend on your mortgage each month. To calculate your DTI, simply divide your monthly debt payments by your monthly gross income. For example, say you have a $300 student loan payment, a $500 auto loan payment, and a $200 minimum credit card payment. Your monthly gross salary is $3,750, which would give you a DTI of 26.67 percent. In this instance, the maximum mortgage payment you would qualify for is $612.50.
Debt can be a real burden, especially when it comes to taking out a mortgage. Lenders often look at your debt-to-income (DTI) ratio to see how much you can afford to borrow. A DTI exceeding 43 percent may make it difficult to qualify for a loan.
Interest Rates
Your ability to repay debts is one of the biggest factors in your overall financial health. Your debt utilization rate, or the percentage of your available revolving credit that you’re currently using, makes up 30% of your score. So, carrying high balances on your cards and only making minimum payments each month can drag down your score.
Unfortunately, when lenders and creditors look at borrowers with lower scores, they often see them as more of a risk. That means you’re likely to get charged higher interest rates on loans and other products. In some cases, you may not be approved for financing at all.
Liberty1Financial.com reports that making smart choices about how you use and manage debt is an important part of maintaining a healthy financial profile.
Job Credit Checks
Working in law enforcement, financial services or the military comes with a lot of responsibility. To help ensure that people in these positions are up to the task, many employers require a credit check as part of the application process. Unfortunately, this can sometimes lead to qualified individuals being rejected simply because they have too much debt.
Bottom Line
Debt bondage can be a difficult thing to break free from, but by following these steps you can begin to make progress toward getting out of debt and improving your financial situation overall. Be sure to take note of why you got into debt in the first place and change your behavior to avoid falling into the same cycle once your balances are paid off.
