Paying off your debt can be difficult. It might take all of your extra money each month just to keep up with your monthly bills and save for a rainy day. But, making only the minimum payments to your creditors could leave you in debt for a long time. To avoid this, try to pay more than the minimum payment each month.
There are many options available to help you get out of debt, and not all of them have to be unpleasant. You can work on your budget to free up funds to pay more than the minimum amount each month, or you can consolidate your debts with a loan or balance transfer card. Another possibility is using the debt snowball method or using financial windfalls to eliminate your balances faster. As a last resort, you can settle your debts for less than what you owe. The best strategy for you depends on your unique situation and financial goals.
How much debt does the average person owe?
Debt is a burden that many Americans carry. On average, each person owed $96,371 in 2021. This debt can come in many forms, such as mortgages, credit card balances, auto loans, personal loans, and student loans.
|Age group||Average debt load|
|Gen Z (18-24)||$20,803|
|Gen X (41-56)||$146,164|
|Baby boomers (57-75)||$95,607|
|Silent generation (76+)||$39,859|
Debt relief strategies
Are you ready to get rid of your debt? Follow these steps and you’ll be on your way.
1. Pay more than the minimum payment
Making a budget is the first step to take when you want to get out of debt. Decide how much money you can put towards your debt each month, and then make a plan to pay more than the minimum payment.
It will take you almost four years to repay the balance on your credit card debt of $15,000 at 17 percent APR with only minimum payments of $450 per month. You’ll end up paying a total of $5,500 in interest charges.
Assuming you’re able to pay $550 a month, you could be debt-free in less than three years and only end up paying $4,100 in total interest. To get an idea of how this would work, try using a credit card payoff calculator.
Why this works: Making larger payments than the minimum amount due can help to reduce the outstanding balance on your credit cards more quickly.
How to start: It’s important to make your extra payment before the due date in the current billing cycle. This will help you avoid any late fees and keep your account in good standing.
2. Try the debt snowball
Debt reduction doesn’t have to be complicated. The debt snowball method is a simple and effective way to pay off your debts, one at a time. Just make the minimum payment on all your debts except for the smallest one. Then, put as much money as you can toward the smallest debt until it’s gone. Once that debt is paid off, you can focus on the next smallest debt. This method is called the “snowball” method because each debt that you pay off gives you more momentum to tackle the next one.
Debt snowballing is a method of debt repayment where you focus on paying off your loans with the lowest balances first. So, in the scenario above, you would focus on paying off your $1,000 auto loan before tackling your $5,000 credit card balance or $10,000 in student loans.
This method, often called “snowballing,” can help you stay motivated and on track. It can also save you money in interest charges over time. However, there are some types of loans that you should not try to pay off using this method. These include payday loans and title loans, which usually have much higher interest rates (between 300 and 400% APR on average). It is best to pay these off as quickly as possible.
Why this works: The debt snowball method is an effective way to pay off your debt. With this method, you’ll see progress quickly, which will motivate you to keep going.
How to start: To ease the load, make a plan to pay off your debts from smallest to largest. Continue making minimum payments on all debts and use any extra money you have to put toward the debt with the lowest balance until it’s paid in full. Then move on to the next smallest debt and so on.
3. Refinance debt
Debt can be a big burden, especially when the interest rates are high. Refinancing your debt to a lower interest rate can save you hundreds in interest and help you repay your debt faster.
Debt consolidation and balance transfer cards are two options that can help you save on interest and manage your debt more easily. With a debt consolidation loan, you can receive lower interest rates than what you’re currently paying on your debts. A balance transfer card usually comes with a 0% APR for a set period – usually between six to 18 months – which can give you some breathing room to pay off your debt without accruing more interest.
Why this works: Refinancing your mortgage can save you money by getting you a lower interest rate. Your monthly payments will be more predictable, and you’ll have a set loan term to help you get to the finish line faster.
How to start: Doing some extensive research beforehand will help make the decision easier. Once you have chosen a debt consolidation loan or balance transfer card that works for you, getting preapproved can help you get the best possible rate.
4. Commit windfalls to debt
It can be tempting to spend your tax refund or stimulus check on something fun. But consider using that money to pay down your loans instead. By doing so, you can save yourself money in the long run. You can choose to apply the entire amount to your debt, or split it between debt and savings.
Any extra money you come across can be put towards paying off your debts faster. This could include bonuses from work, cash gifts, or inheritances. Every little bit counts when you’re trying to reach your debt-free goals.
Why this works: When it comes to paying off debt, using financial windfalls wisely can help keep things moving in the right direction.
How to start: Make a plan for how you will use the money, and stick to it so that you don’t end up spending more than you can afford.
5. Settle for less than you owe
Debt settlement may be a good option for people who are struggling to pay their debts. With debt settlement, creditors agree to accept less than the full amount owed. This can help reduce the monthly payments and make it easier to pay off the debt. Many companies offer debt settlement services, so it is important to do some research before choosing one.
There are some risks associated with trying to settle debts for less than what is owed, according to the Federal Trade Commission. One risk is that 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: Paying only a portion of what is owed to creditors can provide relief and a sense of freedom knowing the debt is no longer outstanding.
How to start: Your creditors may be willing to settle your debt for less than the full amount you owe. You can try to negotiate a settlement on your own or hire a debt settlement company to do it for you.
6. Re-examine your budget
The two best ways to pay off your debts are by earning more money or spending less of it. You may not be able to get a part-time job or side hustle, but you can change your budget.
Spend some time evaluating each line item in your budget. Determine whether it is a need or a want, and highlight expenses that could be reduced or eliminated. Adjust your budget accordingly, and use the extra money to pay down your monthly debts.
Why this works: It’s important to get your finances in order and one way to do that is by making short-term financial sacrifices. This will free up funds that can be used to pay down your balances faster.
How to start: Evaluate your spending habits to identify areas where you can reduce expenses. Move these funds to a dedicated “debt-reduction” account in your budget, and use them to make additional payments on your debts each month.
How debt can negatively impact your life
Debt can be a major obstacle in life, preventing you from achieving your goals. It can make it more difficult to get loans and can lead to higher borrowing costs. Additionally, debt may keep you from landing your dream job.
Borrowers who have a high debt-to-income (DTI) ratio may find it more difficult to qualify for certain loan products. For example, when applying for a mortgage, most lenders will require that your debt-to-income ratio is 43% or less.
It can be difficult to find an affordable home when you have monthly debt payments. Your debt-to-income (DTI) ratio is used to calculate the maximum mortgage payment you could qualify for. This number is found by taking your current monthly debt payments and dividing them by your monthly gross income. So, for example, someone with a $300 student loan payment, $500 auto loan payment, and $200 minimum credit card payment would have a DTI of 26.67%. This means that they would qualify for a maximum mortgage payment of $612.50.
Your debt-to-income ratio is an important factor in qualifying for a mortgage. A high DTI can make it difficult to qualify for a loan and may also impact your ability to save for other goals, such as retirement or your child’s college education.
Your 30 percent utilization of your revolving account’s limit affects your score. Your lower score may be due to your high balances on cards and inability to pay more than the minimum each month.
Although having a lower credit score may make it more difficult to get approved for loans or lines of credit, there are still options available. Many lenders are willing to work with people who have less-than-perfect credit, and by shopping around, you may be able to find more favorable interest rates.
Job credit checks
Your employment prospects may be adversely affected by a bad credit score. Companies in law enforcement, finance, and the military often check credit scores as part of the application process. A low credit score may indicate financial instability, which could lead to problems on the job such as accepting bribes.
Breaking the chains of debt bondage can be difficult, but by following these steps you can begin to take control of your debt and improve your financial health. Just remember why you got into debt in the first place and make sure to change your behavior so that you don’t find yourself in the same situation again. With a little effort, you can be debt-free in no time!