- Getting out of debt starts with a thorough tally of your finances, including your expenses, debts and income.
- There are quick ways to reduce your debt, and longer-term strategies you can use to keep debt under control.
- Making more money can help put a bigger dent in your debt—we’ve got some suggestions for what to do.
- Reward yourself for sticking to your plan! Patting yourself on the back is a great way to stay motivated.
Debt can be extremely stressful and can get in the way of your financial goals. But how to pay off debt doesn’t have to be a mystery.
Creating manageable, sustainable habits is key to achieving any financial goals. Our step-by-step plan will help you do just that.
There is no quick fix to paying off your debt. The best course of action is to understand your debt, create a plan, cut your expenses or increase your income, and just get started. By having a sustainable and actionable plan in place, you can reach your financial goals in no time. After all, there is no better feeling than being completely debt-free.
Inside this article
Step 1: Figure out how much debt you owe
Confronting your debt is never easy, but it’s a crucial step. While many debts are reported to credit bureaus, some aren’t. That’s why it’s important to do a thorough investigation of all the payments you owe to creditors.
Here are some things you can do to figure out just how much debt you owe and to whom.
Check Your Credit Report
The three major credit bureaus are Experian, TransUnion and Equifax. While a credit report from one bureau might reflect an outstanding payment, another may not. That’s why it’s best to check your reports from all three bureaus.
Each year, you can get one free credit report from each bureau through AnnualCreditReport.com. You can also use an app like Credit Karma or Credit Sesame to receive free credit reports from TransUnion and Equifax along with financial advice to help you save money and manage your debt.
A credit report will list your personal information, credit accounts, credit inquiries and collections. Keep an eye out for your credit accounts and debt collections to determine how much you owe.
The report will note the type of account you opened, the date you opened your account, your account balance, the loan limit and your payment history. Your credit report will also include debts that are overdue and have been sent to collections.
Staying organized is incredibly helpful for tracking your total debt balance and keeping a record of future debt.
While learning the details of your debt for each account, keep note of this information:
Your creditor’s contact information
Minimum monthly payments
From there, make a list of all active accounts and any outstanding balances on each account. You can use a digital spreadsheet or you can keep a notebook nearby to ensure that you don’t miss anything.
Go Through Your Mail and Listen to Past Voicemails
Take the time to gather old and current mail for any outstanding bills that need to be paid. Collection agencies might also leave you voicemails for any debt you owe.
Contact Your Creditors and Look Through Past Statements
While most creditors will report account activity to credit bureaus, they may opt not to. Old debts, medical debt and retailer debts are just a few of the debts that may not be reflected on your credit reports.
In addition to checking your reports, look through old statements or check online bank statements to ensure you include outstanding debts not included in your credit reports.
Step 2: Evaluate your financial situation
Paying off and keeping yourself out of debt require a degree of self-awareness. Are your debts due to borrowing like mortgages and student loans? Or are they a result of unmanaged spending habits?
Here’s how to evaluate your financial situation so you can create an effective budget and repayment plan you can actually stick to.
Gather Your Financial Statements
Gather financial documents such as credit card and bank statements, receipts, mortgage statements, pay-stubs or W-2s, and federal tax returns for the past year or two.
Identify Fixed and Variable Monthly Expenses
Create a list of your monthly financial obligations.
Fixed expenses are recurring expenses that cost the same amount each month. These are usually rent or mortgage, auto loan payments, internet, product subscriptions and some utility bills.
Variable expenses are expenses that vary from month to month, like groceries, recreational activities and gifts.
Figure Out Your After-Tax Income
If you’re a salaried employee, take a look at your pay stubs for the past two to three months. On each pay stub, locate your net pay for the month. Your net pay is your take-home income after taxes, withholdings and deductions.
If you’re self-employed, you’re typically paying taxes quarterly, so look back at your income for a few months to get an accurate picture of what you earned versus what you kept after taxes.
Now compare your after-tax income to your monthly expenses. Are you living beyond your means—typically spending more than you’re making?
If so, maybe it’s time to trim your expenses.
Step 3: Reduce your expenses and/or increase your income
One way to get out of debt is by freeing up more money—by reducing your expenses or increasing your income. Here are a few tips to find more money in your budget.
Reduce Your Expenses
To cut your spending, start by tracking your expenses and creating a budget.
Tracking every expense can be tedious, but it’s the only clear way to know what comes in and out of your bank account. Fortunately, you can use free apps like Mint and PocketGuard to track your spending.
Creating a sustainable budget doesn’t have to be complicated. Take a look at your fixed and variable expenses, and organize them by needs, wants and savings.
A common budget allocation follows the 50/30/20 rule:
50% for needs
30% for wants
20% for savings and debt payment
Since your primary goal right now is paying debt, you might want to shift some of the share of wants toward debt payments for a while. So instead of the standard 50/30/20, your budget might look more like 50/20/40 while you pay down big debts.
Cut Unnecessary Spending
It might seem difficult to renegotiate expenses, especially mandatory ones, but there are ways to make living within your means possible.
Variable expenses allow for some degree of flexibility that fixed expenses may not. For instance, according to the USDA, a family of four on a moderate to liberal cost plan will spend about $900 to $1,200 on groceries per month. Shopping for cheaper groceries or regularly searching for deals could save you hundreds of dollars a month.
Fixed expenses are a bit more difficult to alter, but it’s possible. Housing expenses are most likely your biggest financial obligation. If you’re a renter, you could sublet an apartment, get a roommate or move to a cheaper city.
If you’re a homeowner, you can refinance your mortgage to get lower interest rates, rent out a room or portion of your home, or even sell the home and downsize to a smaller house or rental for a while.
These might feel like extreme moves, so consider your financial priorities before deciding where to put your money and where to save.
Increase Your Income
In addition to reducing your expenses, find ways to increase your income. You might consider:
Asking for a raise at work
Picking up a second job
Starting a side gig
Selling items around your house you no longer need
Reevaluating what you need versus what you can live without can be difficult. However, cutting expenses and increasing your income can help you pay off your debts more quickly.
Step 4: Pay down some debt quickly
Below are some quick fixes to help give you a boost toward a clean slate free from debt.
But exercise caution before proceeding with some of these options. You may end up with higher interest rates and monthly payments if you neglect to read the fine print.
Stop Using Credit Cards for As Long As You Can
Credit cards can be an extremely useful tool. They’re helpful for building your credit score, and you can reap the benefits of rewards and cash back.
However, accruing credit card debt can have an adverse effect on your credit score and overall finances—especially if you’re already in debt.
A quick way to manage your debt is to stop using your credit cards so the debt stops growing. Switch to your debit card or, even better, consider using cash more frequently to avoid spending more than you bring in.
Consolidate Your Credit Card Debt
Debt consolidation lets you replace multiple debts with one debt consolidation loan, which will simplify your repayment process and could reduce how much you spend in interest.
The biggest advantage of debt consolidation is that you may be able to pay off your debt at a lower interest rate. Plus, you’ll have one monthly payment as opposed to multiple monthly payments to track.
A few risks to consider: You may not qualify for a rate lower than your existing debts if you have a low credit score. If you fall behind on your payments, you could end up jeopardizing your credit score even more, and you’ll be stuck paying higher late fees.
Open a Balance Transfer Card
Credit card issuers will often offer promotional balance transfers at 0% interest on your current debt. This will save you from paying interest on debts from your previous accounts if you pay off the balances within the time limit.
The drawback? Balance transfer cards usually come with fees, often a percentage of the amount transferred. Additionally, if you have an unpaid balance after the 0% introductory promotion ends, the remaining balance might be subject to the card’s higher APR.
Step 5: Choose a long-term repayment strategy
Paying off your debt doesn’t come with a one-size-fits-all solution. Figuring out how much you can pay and how you’d like to repay your debts is key to consistent payments.
Figure Out How Much You Can Pay
Paying more than your minimum monthly payments will help you eliminate debt faster and avoid accruing interest. Take the budget you created in Step 3, and look at the savings you’ve allocated toward debt payments. From there, you can choose the debt elimination strategy that works best for you.
The Debt Avalanche Method
With the debt avalanche method, you’ll pay off your accounts from the highest interest rate to the lowest.
Start by making minimum payments on all of your accounts, then use your extra debt payment savings toward the account with the highest interest rate.
Continue to do this until the account with the highest interest rate is paid off. Then proceed to pay off the account with the next highest interest rate.
The benefit of this method is that paying off the accounts with the highest interest rate first means saving money in the long run.
The drawback? It’ll usually take longer to see clear progress—i.e., check debts off your list—because the account with the highest interest rate might also be the account with the highest balance.
Debt Snowball Method
With the debt snowball method, you’ll pay off your accounts from the smallest to the largest balance.
Start by making minimum payments on all of your accounts, then use your extra debt payment savings toward the account with the smallest balance.
Continue to do this until the account with the smallest balance is paid off. Then proceed to the account with the next smallest balance.
Tackling the smallest balance first will help you recognize progress faster as you drop debts from your list, and it may help boost your credit scores.
However, this method could be costly in the long run, because you let interest accrue on higher-interest accounts for longer.
Step 6: Start an emergency fund
Life can be unpredictable. That’s why setting aside cash for emergencies can be a life—and wallet—saver.
With an emergency fund to fall back on, you’re less likely to rely on credit cards or loans for unexpected expenses. This can prevent you from going further into debt.
Here are some ways to build an emergency fund, even while you’re working to get out of debt.
Create a System for Making Consistent Contributions
Setting aside daily, monthly or weekly savings toward an emergency fund will ensure that you meet your savings goals. How often you make these contributions and for how much is up to you.
Save Any Windfall Income
Windfall income is any one-time financial gain that’s beyond your expected income. It might be tempting to spend your entire economic stimulus check or tax refund on a shopping spree, but consider putting at least some of your unexpected funds aside to build your emergency fund.
Keep the Change
Keep any loose change you receive from purchases. If it comes in the form of coins, stash it away in a jar. Or try apps like Chime and Acorns, which automatically move your change into a savings account so you don’t have to track and move it manually.
Step 7: Be consistent
Continue to make debt payments and spend within your budget. Finding ways to stay consistent such as having an accountability partner or automating your savings and payments can help you reach your financial goals. Here’s how to hold yourself accountable.
Paying your debt off isn’t an easy feat, especially if you have multiple accounts. It’s crucial to keep track of your progress by revisiting your total debt balance periodically. It may be helpful to have monthly money goals to stay on track toward beating your debt.
Rewarding yourself through the process can keep you consistent and motivated. Giving yourself a little treat doesn’t have to break the bank. Pick a recreational activity you really enjoy, and use it to reward yourself for conquering a debt payoff milestone.
Step 8: Research options for debt-relief help
If your debt situation becomes unmanageable, consider getting help from financial experts.
Nonprofit credit counselors often offer free consultations to those in need of debt relief and budget management. Credit counselors can also negotiate with your creditors for lower interest rates or monthly payments.
Watch out for scam debt-relief companies. The Federal Trade Commission warns that a legitimate credit counseling agency will provide you free information about its services without inquiring about your situation. You can also check with your state attorney general and local consumer protection agency to check for complaints about any companies you come across.
Also, the FTC requires debt-relief companies to disclose their fees and any conditions of their services before you sign up. Credit counseling agencies that sell you a debt management plan can’t charge a fee until you’ve made at least one payment to your creditors with the plan.