How to get out of debt

Debt isn’t always bad. But when debt becomes hard to manage or it feels like it’s between you and major financial goals, it may not seem that way. 

With household debt on the rise, you might wonder: How can I get out of debt? Thankfully, there are plenty of strategies and tactics you might use to pay off debt.

What you'll learn:

• Tracking monthly expenses and building a budget can help you determine how a debt repayment plan might fit into your financial situation.

• The debt snowball method, debt avalanche method and debt consolidation method are three strategies for getting out of debt.

• If you’re worried about not having enough money to pay off debt, it could be helpful to discuss your situation with a financial professional.

Before you consider ways to get out of debt, it might be helpful to first create a budget. 

As the Consumer Financial Protection Bureau (CFPB) explains, “Making and sticking to a budget is a key step toward getting a handle on your debt.” The CFPB recommends asking yourself these three questions to get started:

1. Where does my money come from? An hourly wage or annual salary may be only one of your sources of money. Consider other forms of income like tips, bonuses, income from self-employment, investment income, support from family, government benefits and child support.

2. Where does my money go? Keeping track of your spending will help you see exactly where your money is going. You could even consider sorting your spending into different categories.

3. What bills do I have to pay, and when are they due? Keeping up with your bills and their due dates can be tough. Consider using a calendar to help you stay on top of things and plan ahead.

Once you start tracking your income, spending and bills, you can create your working budget. Then the CFPB recommends taking a look at your finances one month at a time. Next, analyze your spending habits and look for areas where you can cut back on expenses. Finally, you can set a goal so that you have something to work toward.

After budgeting and setting a clear financial goal, you can begin to consider different strategies for paying off your debt and which ones would work best for you.

If you’re looking to get out of debt entirely, it might be wise to speak with a qualified financial expert before making any major decisions, such as filing for bankruptcy. When it comes to budgeting and debt repayment goals, a financial professional might be able to identify areas where you can save. They can also help you create a more informed debt management plan.

Debt repayment strategies aren’t necessarily one size fits all. It helps to take time to identify the types of debt you’re dealing with in order to understand the short- and long-term impacts. It’s also helpful to investigate fees, interest and other potential costs like balloon payments or early payment penalties.

With that in mind, here are three common methods for getting out of debt:

The debt avalanche method, also known as the highest interest rate method, is another basic debt payoff strategy the CFPB suggests.

With the debt avalanche method, you continue making the minimum payments on your debts and focus on paying off the balance with the highest interest rate as quickly as possible. Then you move on to the balance with the next highest interest rate. In other words, you create an avalanche of payments as you pay off debts.

Progress may feel slow with the debt avalanche method because you won’t be paying off individual debts as quickly as you would with other methods. But it can save you money in the long run by prioritizing your most expensive debts sooner rather than later.

With the snowball method, you continue making the minimum payments on all your debts and focus any extra money on paying off your smallest balance as soon as possible. Once you’ve paid that balance in full, you use the money you’ve freed up to pay off your next smallest balance—and so on. 

The snowball method could help you eliminate some debt faster. However, paying off your smallest balances first costs you more in the long run if you neglect larger balances or high-interest debts.

Debt consolidation is another debt payoff strategy that might simplify and lower monthly payments. It could even be combined with the avalanche or snowball methods.

Credit card debt consolidation, for example, allows you to combine several credit card balances into one monthly payment. You could do this with a balance transfer card or a debt consolidation loan. If the credit card or loan has a lower APR than your current accounts have, you may be able to save on interest.

Some credit cards even offer limited time promotional rates, such as a 0% introductory annual percentage rate (APR). But be sure to compare cards and check what the APR will be once the introductory rate expires. It could be even higher than the rate you were paying before.

It’s also worth mentioning that you can’t typically transfer balances from one card to another card from the same issuer.

If you’re considering taking out a loan as a means of debt consolidation, it’s important to remember that not all personal loans are the same. Here are a few things to keep in mind:

• Personal loans: Most are unsecured. That means the loan doesn’t require collateral, an asset that a lender can take if you don’t repay the borrowed money. But lenders also might consider unsecured loans to be riskier than secured loans. And that means unsecured loans may have higher interest rates.

• Home equity loans and home equity lines of credit (HELOCs): Borrowing against your home can be risky because it’s considered collateral. If you can’t pay back the loan or HELOC, you could face foreclosure on your home.

• Risky loans: There are some types of loans you should generally avoid. Short-term, high-cost loans like payday loans can come with numerous costs and fees as well as extremely high interest rates. Payday loans are even illegal in some states.

• Credit counseling: If you’re looking for professional help, you might consider how a credit counselor could help. According to the CFPB, these organizations could “advise you on your money and debts, help you with a budget, develop debt management plans, and offer money management workshops.”

• Debt settlement companies: The CFPB warns that debt settlement companies (DSCs) can be risky. The agency notes that DSCs charge expensive fees and typically encourage customers to stop paying bills, which can result in late fees, penalties and a hit to your credit score. Per the CFPB, “Debt settlement may well leave you deeper in debt than you were when you started.” 

Three common strategies for paying off debt are:

• Debt snowball method, which focuses on the smallest balance first.

• Debt avalanche method, which focuses  on the highest-interest debt first.

• Debt consolidation, which involves combining multiple balances into one account.

Becoming debt free requires consistency and patience. However, making efforts to get out of debt doesn’t always mean your other financial goals have to be put on hold. For more budgeting help, read more about how to save money and still pay off debt.

And if you’re considering debt consolidation as a strategy, you can explore Capital One balance transfer credit cards.