4 Simple Steps to Get Out of Debt
Reading time: 5 Minutes
June 4th, 2020
Debt can be a powerful financial tool. With the right loan or credit card, you can buy a home in Hawaii, take the trip of a lifetime, plan your dream wedding and accomplish other life goals.
Of course, not all debt is good debt. Sometimes, the debt you have doesn't match the goals you want to achieve. Student loans might make it harder for you to afford a home of your own. A high credit card balance might keep you from buying a new car. Paying down debt that doesn't work for you can help you qualify for other loans that will better fit your needs, or free up money in your monthly budget that can be used for other expenses.
Repaying debt can be challenging and rewarding. To help you get started, here are four straightforward steps you can take right now:
1. Get Organized
To pay down debt, you'll need a plan. Step one is to take a full inventory of everything you owe, including your student loans, your car loan and all your credit card balances. You don't need a fancy spreadsheet to keep track of everything. You can just make a list. For each loan that you have, write down how much you owe, what the interest rate is, how much your monthly payment is and when your payment is due each month.
This information should be on your monthly statement for each of your loans. If you don't have a recent statement for a particular loan, you may be able to access this information online. If that's not an option, call your lender and ask for these details.
2. Choose a Debt Repayment Strategy
Once you've made your list, decide which debts you want to pay off and which you can keep. To pay off debt reasonably quickly, you'll generally want to pay more than the minimum required monthly payment.
There are two popular strategies for making a substantial dent in your overall debt level: the snowball method and the avalanche method.
- Snowball. With the snowball method, you pay off your smallest debt first, even if the interest rate for that debt is lower than other debts you have. It's not the absolute fastest way to pay off debt, and you will pay more interest, but this approach can give you quicker wins that can motivate you to stick to your debt reduction plan.
- Avalanche. The avalanche method involves paying off your highest-rate debt first, even if the balance for that debt is higher than the balance for other debt that you have. This approach works to lower the overall amount of interest you're paying, which means more of your money can go toward paying down debt.
You can combine or alternate these methods to score some wins and lower your interest expense. Choose whichever strategy feels right for you.
In any case, you should make at least the minimum payments for all your debts every month. If you miss a payment, you could be hit with penalties and higher rates of interest that will make debt repayment harder. Missed payments will also hurt your credit score.
Mark your calendar to make your payments before they're due. For each date, note the minimum payment and the additional amount you intend to pay toward the principal.
3. Lower your Expenses
This may sound like obvious advice, but the quickest way to reduce debt is to increase the size of your monthly payments. And the best way to do that is to free up additional money that's currently going to other expenses in your life. Take a hard look both at your monthly budget (your planned spending) and your actual day-to-day spending habits (the unplanned and impulse spending that can sometimes get away from us).
For your budgeted spending, you'll want to start prioritizing and slimming down. Maybe you can eat out less often, or switch to a lower-cost cell-phone service provider. There are a million ways to save a few dollars and cents here and there, and they all add up. Click here for 50 ideas for saving money.
If you find you have a habit of buying things in the spur of the moment, throwing roadblocks in your own way can be a good way of keeping more money in your bank account. Some people throw their credit cards in a block of ice in the freezer, or force themselves to wait a few days before making any big purchases. Whatever works for you.
Before you know it, you'll be throwing all that saved money toward your loans and credit card balances, reducing your debt even faster!
4. Consolidate Debt to Lower your Rates
One major element that can slow down debt repayment is high interest rates. Many credit cards, for example, have interest rates of more than 20 percent. The higher the interest rate, the less you'll be paying toward your principal balance with each monthly payment.
You can tackle your debt faster by shrinking the interest rate you're paying on it. The most common way of doing this is called debt consolidation—paying off all your different high-interest debt balances with a single, lower interest loan. Imagine converting several 20+ percent interest rate credit card balances into one combined balance with a single-digit interest rate. If you can qualify for this kind of loan, the reduced interest rate could translate into big savings.
You can consolidate debt using either an unsecured loan or a secured loan. The difference between these two types of loans is that for a secured loan, you put up some asset, maybe a piece of property or a savings account, as collateral. The advantage is that you will typically get a lower interest rate for a secured loan, but if you default on your loan, you could lose your collateral. Consult with a lending professional to figure out which kind of debt consolidation loan best fits your needs.
By taking these four steps, you'll be able to make real progress toward getting out of debt. Debt reduction doesn't always happen overnight, but over time, it can help you achieve the goals that matter the most to you and your family.
You're about to exit BOH.com
Links to other sites are provided as a service to you by Bank of Hawaii. These other sites are neither owned nor maintained by Bank of Hawaii. Bank of Hawaii shall not be responsible for the content and/or accuracy of any information contained in these other sites or for the personal or credit card information you provide to these sites.