Insights & Stories

Get out of Debt: Tips for Taking Control of Your Finances

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June 18th, 2021

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If you feel like your debt is weighing you down, there are multiple ways to find debt relief. In fact, knowing that you want to do something is a great first step.

The tips below can help you find ways to get out of debt and take control of your finances.

Create a Budget

Having a budget can help you both pay off debt and avoid incurring additional debt. Even if you haven't made one in the past, making a budget now can be the most powerful step you take toward getting your debt under control.

Your first step towards making a budget that fits your life and debt paydown goals is to make a list of all of your current loans. Be sure to include your total balances, minimum monthly payments and the interest rate for each loan.

Once you have your debt information listed, you can then use that information to plug into a simple budget spreadsheet to see where you can find extra money each month to put towards your debt.

Use a Simple Paydown Strategy

One of the leading ways to get out of debt is to use one of two popular debt paydown strategies: debt snowball and debt avalanche.

Using the debt snowball method, you'll tackle your debts in order from lowest to highest balance while making the minimum payments on all your accounts. With each paid-off balance, you'll garner a sense of accomplishment and feel motivated to keep going until all your debts are satisfied.

With the debt avalanche method, you'll tackle your debts in order from the highest interest rate to the lowest interest rate while still making your minimum payments on all of your accounts. Once your highest interest rate debt is paid off, you'll take the money you put toward that debt and add it to the minimum payment on the debt with the second-highest interest rate.

While the debt avalanche method will save you the most in interest over time, the best debt paydown strategy is the one that will keep you motivated.

Consider Debt Consolidation

Another way to get out of debt is through debt consolidation. With debt consolidation, you'll take your higher interest debts, from credit cards or other high interest loans, and combine them into one loan (generally a personal loan) with a lower interest rate. Here are some different approaches to consolidate debt:

  • Credit card balance transfer: Many credit cards offer low introductory interest rates or promotional balance transfers. You can transfer all of your credit cards to a low-interest rate card, save on interest, and pay down your debt faster. However, keep in mind some of these offers do have transfer fees.
  • Secured loan: Secured loans require the borrower to offer up a valuable asset as collateral, which can be possessed by the lender and sold off, if the loan is not repaid per its contracted terms. Because you assume more risk with a secured loan, the amount available to borrow is typically higher, easier to get, has a lower interest rate, and a longer length of time to repay than an unsecured loan.
    • home equity line of credit (HELOC) is an example of a secured loan. Using your home as collateral, you can take out a loan against the available equity in your home to help consolidate debt.
  • Unsecured loan: Unsecured loans do not require the borrow to offer up a valuable asset. Because of this, they might have a higher interest rate than a secured loan, and the amount you can borrow is typically lower. However, these can still be a good option for debt consolidation.

For more on different types of loans and lines of credit, be sure to read Understanding Types of Loans and Line of Credit Options.

Contact Your Creditors and Debt Collectors

No matter the type of debt paydown strategy you choose, contacting your creditors during the process can definitely help.

Creditors like account holders who are proactive. Even if you're behind on payments, reaching out will demonstrate that you're making an effort to be a good customer and find a way to hold up your end of the bargain. Creditors can oftentimes lower your interest rate or offer payment plans to help you manage your debt.

If you have an account that's gone to collections and debt collectors are calling or sending letters, you can use the same proactive strategy to build a line of communication.

As debt collectors only get paid when you make payments, you can explore options like payment plans. If you're able to pay off your debt in a lump sum, debt collectors can be authorized to accept settlements of less than your outstanding balance.

Explore Debt Relief Services

If you find that the methods mentioned above haven't worked the way you'd like or aren't available to you because of a lower credit score, you can try using a credit counseling or a debt relief service.

These services are typically nonprofit organizations dedicated to helping you end the cycle of debt. While some are free and others charge low monthly fees, all will reach out to your creditors and negotiate on your behalf. Credit counselors will also usually work with you to help you set a budget and offer educational materials to help you develop positive money management habits.

Before signing up with any services, make sure you are not falling for a debt relief scam. Read the company's reviews and see if they have any complaints from the Better Business Bureau. Beware of any organization touting a "new government program" to help you get out of debt or one with marketing that seems too good to be true. Reputable debt relief and credit counseling companies are transparent and trustworthy, with plenty of public information available.

Consider Bankruptcy as a Last Resort

If every attempt you've made to get your debt under control still leaves you gasping for air each month, you can explore bankruptcy. Always a last resort, bankruptcy can help give you a financial fresh start, but it's not without its limits and consequences.

For example, bankruptcy can't erase federal student loans, child support, most types of tax debt, or debts taken out after you've filed for bankruptcy.

As for consequences, it's not free to file bankruptcy, and you'll be looking at having your bankruptcy on your credit report for between 7 to 10 years, depending on the type of bankruptcy you file. You'll basically need to rebuild your credit from ground zero.

With all of the ways to get out of debt above, you can now take actionable steps to get out of debt (and stay out of debt). To learn more about different types of loans and how best to borrow money, read Tips for Borrowing Money: What You Need to Know about Loans.

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