- Figure out what you can pay towards your debt each month.
- Take care of your debt on your own, if you can pay more than your minimum payments.
- Look for professional help, if you can't pay your minimums each month.
Basic Strategies for Getting Out of Debt
Are you overwhelmed by debt? If so, you’re not alone. There are many Americans that are struggling with debt. The collapse of the housing market, high unemployment, and increased living expenses have caused financial strain across the country.
Millions of Americans need help getting out of debt. What kind of help you need, depends on different factors, including how much financial strain you’re currently experiencing.
Barely Above Water or Drowning?
Maybe you are treading water, barely keeping afloat. Maybe you are paying all your bills, but are only able to do so by using your dwindling savings, taking a second job, or by trimming every extra expense you can. Even if you’re paying your bills on time, you might only make a minimum payment, so your credit card balances are not coming down. Worse, you may see your balances rising, even when making your required minimum payments, if you are using your credit cards to pay for some of your basic expenses, like food, gasoline, or clothing.
When you’re looking for help getting out of debt (or anytime you are trying to improve your financial health), an important first step is to start and maintain a budget.
As a starting point, you should:
- Figure out your debts: Who you owe, how much you owe, and the size and your required monthly payment.
- Figure out your income. What do you have each month, after your taxes and other required deductions are taken out of your paycheck.
- Figure out your fixed expenses. How much do you pay for your housing, utilities, or car payment? Don’t forget to account for bills that aren’t due monthly, like car registration or school expenses.
- Figure out how much money you can devote towards paying off your debt each month. No debt reduction strategy is going to work unless you see it through. If you can’t afford to make required payment a debt reduction approach demands, then that approach will not help you get out of debt.
Your Best Choice for Getting Out of Debt
Some financial commentators advise you to take care of your debt problems by simply being more efficient. They advise, "Buckle down and pull yourself out of debt," or "Cut your expenses or increase your income." While sound advice for some, things are not always so simple. Too many people have had their income cut, lost a job, or struggled to keep up with rising food and gas prices. Many Americans have cut discretionary spending to the bone, but still can’t find more money to towards paying.
If you need help getting out of debt, but have not yet cut expenses or tried to increase your income, you should try to do both. If you can find any way to put more money towards your debts than you are paying now, getting out of debt will be faster, cheaper, and easier.
More than Minimums
If you can make more than your required minimum payments, your options for getting out of debt are different than if you don’t always pay your bills.
When you can pay more than the required minimums (and are not running up more credit card debt), choose between these two debt pay-off strategies.
- Snowball: To snowball your debt, you pay the minimum required payments on all of your credit cards except for the card with the smallest balance. Take every extra dollar you can afford you use to pay off the lowest balance debt. Once you pay off the smallest debt, you take on the next smallest. This time, you add everything that you were using to pay off the first card to the amount you send the next smallest debt. The key advantage of snowball is that it energizes you to pay off a debt. It is a liberating feeling to remove one of your creditors from the list of people you owe. The psychological boost you receive gives you the motivation to keep attacking your debts.
- Avalanche: Avalanche has you target the highest interest debt, instead of the lowest balance debt. Your highest interest debt is the one that costs you the most money to finance, so paying off your debts by paying off your debts in order of the highest interest down to the lowest interest debt saves you the most money.
Avalanche saves you more money than snowball, but there is some evidence showing that more people successfully complete snowball. The discipline required to successfully getting out of debt is boosted by snowball more effectively than by avalanche.
Can’t Pay Minimums
When you need help getting out of debt and you can’t consistently pay your debts each month, you have fewer options. Snowball, avalanche or simply being more disciplined in your spending is not going to solve your problem.
You need to look into debt resolution programs that offer you more help, programs that are offered by professionals. You have three main alternatives for professional debt help:
None of these solutions is right for every person. Which one is right for you depends on your goals and how much money you can afford to put towards your debt each month. You need to weigh the pros and cons of each approach.
- Credit Counseling: Credit counseling offers you a financial review combined with a way to lower your interest rates, depending on your current interest rates.
- Debt Settlement: Debt settlement programs can help you resolve your debt for far less than you currently owe by negotiating reduced principal settlements with your creditors.
- Bankruptcy: Bankruptcy is the most radical debt resolution strategy, with the longest negative effects on your credit. However, bankruptcy can get rid of more debt faster than any other method, if you meet the strict requirements to qualify for discharging your debts in a chapter 7 bankruptcy.
Some basic tips to help you find the right debt help for your individual situation include:
- If your credit rating is more important to you than getting out of debt, consider a credit counseling service.
- If you’re looking to avoid bankruptcy and are trying to get out of debt at the lowest total cost possible, consider debt settlement.
- If you’re not able to make the monthly payments that either credit counseling or debt settlement programs require, consult with a bankruptcy attorney.
You can use the free Debt Coach tool that Bills.com developed to compare the main debt relief solutions. Debt Coach accounts for your goals, what you can afford to pay towards your debt, your specific creditors, and your current interest rates. Then, Debt Coach makes a specific recommendation tailored to your individual circumstances. Try it at no obligation today.