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How to get out of debt

5 steps to paying off debt

Profile picture of Kathryn Parkman
by Kathryn Parkman ConsumerAffairs Research Team
man working on finances

If you want to get out of debt you need a financial plan. What kinds of debt you have, and how much, will determine what plan is best for you. Follow these steps to choose a realistic plan, so you don't run the risk of backsliding and ending up with even more debt than before.

1. Know how much debt you have

Before you seek any debt relief, you need to be honest with yourself about what you owe. First, collect all of your most recent credit card and loan statements. You can also get your debt information from your original creditors unless your bill has already gone into collections.

The average American is
$38,000 IN DEBT
excluding mortgage loans

Next, you should get your free annual credit report. You could consult a credit report site for details that can help you better understand how much you owe and to whom. If you discover unexpected debts on your credit report, make a list of those collections. If you’re sure that a debt collection is outdated or belongs to someone else, you can dispute the credit bureaus and have them taken off your credit report.

Remember, not all debts are created equal. The type of debt you have—installment or revolving—will also determine your plan. Revolving and installment debt affect your credit score differently; a high balance on an installment debt won’t sink your credit score as much as an unpaid credit card bill, which is why it’s so important to keep your credit card balances paid off as much as possible.

  • Installment debts: Debts that you make regular payments toward every month, like a mortgage, car payment or student loan, are installment debts. The amount you’ve borrowed doesn’t change over time.
  • Revolving debts: Balances that you carry month over month, like a credit card or a home equity line of credit, are considered revolving debts. These debts can come with a variable interest rate that changes over time.

If you have only a small or minimum amount of outstanding installment debts, there are several ways to pay down your credit card debt and boost your credit score. A student loan consolidation company can simplify your repayments with a better rate if your greatest debt burden is currently your student loan. If the bulk of your debt is from unpaid taxes, you might consider partnering with a tax relief company. If you need to get a lump sum from a court case to cover your financial obligations, a structured settlement company might be able to help.

Now, make a list of all your installment or revolving debts. Add them all together—if that number is daunting, keep reading to find out how to get some relief.

2. Choose a debt repayment plan

The next step to getting your debt under control is coming up with a debt repayment plan. There are many different debt repayment strategies. Most people have a mix of shorter-term revolving debts, like credit card bills, and longer-term installment debts, like a mortgage or student loans. Three popular methods for getting these debts down are the snowball, avalanche and blizzard debt repayment methods. All approaches focus on aggressively paying one debt at a time while keeping up with other minimum payments.

  • The debt snowball method: First, list all your debts by outstanding balance from smallest to largest. Continue to make your regular minimum payments on all debts except the smallest amount. Put as much as possible toward the smallest debt until it is fully paid off. Then, work on the next-smallest debt until all debts are repaid.
  • The debt avalanche method: The avalanche method requires you to prioritize your debts by interest rate. You pay as much as possible toward your debt with the highest interest rate until it is paid off while continuing to make your regular minimum payments on all other debts. When that debt is fully repaid, work on the debt with the next-highest interest rate until you are able to repay all of your outstanding balances.
  • The debt blizzard method: The blizzard is a combination of the snowball and avalanche methods in which you pay off the debt with the smallest balance first. After the debt with the smallest balance is paid off, you then tackle your debt with the highest interest rate, and prioritize by interest rate (highest to lowest) after that.

You’ll pay less interest overall with the debt avalanche method, but the debt snowball method will give you more immediate access to funds. Another commonly used budget plan is the 50/20/30 rule, where 50 percent of your after-tax income is allocated for “needs” like groceries, health care and minimum payments, 30 percent is for “wants” or nonessential expenses like dining and entertainment, and 20 percent is for “savings,” which can also include investments and extra debt repayments.

If you’re not sure how to create your repayment strategy, a credit counselor can help you create a debt management plan. Whatever debt repayment strategy you pick, you should stick to it and monitor your credit each month to see how your overall score is improving.

3. Consider consolidating your debt

Once your credit improves, you might be able to consider a new debt consolidation plan that you weren’t eligible for before. Debt consolidation is a way to refinance all your current debts by combining balances into a single affordable monthly payment with a lower interest rate. Debt consolidation loan companies charge a fee for their services, but it could be worth it for you to simplify the hassle of paying multiple lenders every month and get you on a repayment schedule that you can keep up with, especially if you’re currently tackling medical bills, student loans and credit card debts all at once.

Your debt consolidation options include various loans and lines of credit, like balance transfer cards, which can be a useful tool for the avalanche debt repayment method, and debt consolidation loans.

  • Balance transfer credit card: If you transfer debts to a balance transfer card, you’ll be able to pay off debts without interest during the 0% APR introductory period. Balance transfer cards are a good idea if you’re able to pay off the bulk of the balance during the introductory period, which can be anywhere from 1–2 years.
  • Debt consolidation loan: Taking out a debt consolidation loan lets you pay off your debts on credit. You’ll pay off the debt consolidation loan in fixed-rate installments.

There are also several alternatives to debt consolidation you can also consider, like a home equity loan or a 401(k) loan, but these can be riskier options that can interfere with your house and retirement plans.

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4. Decide if you should settle your debt

Debt settlement and debt consolidation are similar types of debt relief, but they do have critical differences. Debt settlement is when a creditor accepts an amount less than what you actually owe as full payment. On the plus side, you can receive some debt forgiveness and pay a lower amount to settle your debt overall, but debt settlement also has a negative impact on your credit score and can require you pay taxes on amounts over $600.

If you think it might be the best option for you, you can negotiate with your creditor directly or hire someone to do it for you. A debt settlement company can help you negotiate with a creditor to pay off an overdue debt by making regular payments over time. Like debt consolidation, debt settlement is a service some companies offer to individuals with large debts. Debt settlement can be an option if a creditor doesn’t think that you’ll ever be able to pay off a balance in full and is willing to negotiate for a partial payback.

If all else fails, you might need to start seriously considering bankruptcy. Filing for bankruptcy is a difficult financial decision to make and an emotional process. There are two main types, Chapter 7 bankruptcy, in which you’ll be required to surrender some of your assets, and Chapter 13 bankruptcy, in which you’ll be allowed to keep your property. Either way, it’s not easy, and if bankruptcy is your only option you’ll need to find a good lawyer.

5. Begin rebuilding your credit

It could take several months to over a year of paying down debts before you to start seeing improvements to your credit. It takes as long as 7–10 years to fix your credit after more serious financial incident like a foreclosure, tax lien or bankruptcy.  

It takes about
1 YEAR
to see improvements
on your credit score

Moving forward, you should regularly check your credit report and consider a credit repair company if you need assistance disputing or negotiating items that negatively affect your credit score.

You can improve your credit with good habits, like always paying your bills on time. Consider a secured credit card if you can’t qualify for a traditional credit card. It works much like a regular credit card but requires a cash deposit for the amount of your credit limit. Or, you might become an authorized user on someone else’s account, meaning that you can access the line of credit without the legal obligation to pay the bill. Becoming an authorized user or getting a secured credit card helps prove to creditors that you’re serious about making payments and staying out of debt.

As you continue to build better credit, you should also budget for building an emergency fund for yourself and your family. Remember that it will take longer to rebuild your credit if you continue to make the same financial mistakes. The most important factors that lenders consider to evaluate your creditworthiness are your repayment history and your credit utilization rate. As long as you keep making punctual payments and don’t keep opening new lines of credit, you should see steady progress.

Bottom line

If you currently have a lot of unpaid debts and want to make a plan to pay it off, you need to figure out how much you owe and pick a repayment strategy. You should consider your debt consolidation options and decide if a debt settlement could be in your best interest. Then, the only thing left to do is stick to your plan.

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by Kathryn Parkman ConsumerAffairs Research Team

As a member of the ConsumerAffairs Research Team, Kathryn Parkman believes everyone deserves easy access to accurate and comprehensive information on products and businesses before they make a purchase, which is why she spends hours researching companies and industries for ConsumerAffairs. She believes conscious consumption is everyone's responsibility and that all content deserves integrity.