10 Strategies for Becoming Debt-Free

Getting out of debt is not easy. Sometimes it takes everything you have to keep up with monthly bills and save for a rainy day, let alone pay your minimum monthly credit card payments.

Fortunately, there are plenty of ways to get out of debt that won’t make you miserable. These are some of the best strategies to becoming debt free.

How debt can negatively affect your life

Being in debt can make it harder to qualify for other loans. For example, if you want to buy a home, most lenders require you to have a debt-to-income (DTI) ratio of 43 percent or less, including future mortgage payments.

The DTI ratio is calculated by adding your current monthly debt payments and dividing by your monthly gross income. Let’s say you have a student loan payment of $300, a car loan payment of $500, and a minimum credit card payment of $200. His gross monthly salary is $3,750, which makes his DTI 26.67 percent.

In this case, the maximum mortgage payment you would qualify for is $612.50. Depending on your location, it could be nearly impossible to find a home in that price range.

If your DTI is already over 43 percent without a mortgage payment, you may find it impossible to qualify for a mortgage. Having too much debt can also make it harder to save for retirement, your child’s college education, or other goals.

Also, if you work in law enforcement, financial services, or the military, your employer may run a credit check when you apply. You may be turned down if you have too much debt, because a vulnerable financial situation puts you at a statistically higher risk of taking bribes.

Organize all your debts and bills

Before you can devise a debt settlement strategy, you need to compile a list of all your current bills and loans. Review your bank accounts and credit card statements for the last six months and write down all loans, bills and other recurring fixed expenses.

Your list should include the monthly payment, total balance, interest rate, term, and any other relevant details. For example, you should note if any of the loans are currently in deferment or on a special payment plan.

To make sure you haven’t missed anything, check your credit report to see all current loans and lines of credit. You can check your credit report for free once a week through AnnualCreditReport.com until April 20, 2022. After that, it’s free once a year.

Be sure to check your credit report from all three credit bureaus. Some lenders don’t report credit activity with all three, so if you only check one or two, you may be missing important information.

Strategies to get out of debt

If you’re ready to get out of debt, start with the following steps.

1. Create a budget

A budget will help you make better decisions about your money and give you an idea of how much you can spend on your debt each month.

Don’t try to manage your expenses in your head; seeing the numbers on paper allows you to see the big picture without relying on your memory. Your budget can also help you decide where you could free up money to pay off your debt.

2. Distinguish between bankruptcy and overspending

Are you using “broke” to describe what happens after you’ve spent all your money on non-essential items and not bills? If so, you’re not really broke.

You can make some changes to the way you spend to create additional space in your budget. If you really don’t have money, don’t make it worse by making poor decisions, like spending on things you don’t need.

3. Prepare a plan

Paying off your debt should always start with a plan, no matter how much money you have, and even if you can’t start paying off your debt right away. Start by listing your debts along with the balance and interest rate.

Prioritize your bills, writing down the order in which you want to pay them, for example, debt with the highest interest rate first, lowest balance first, or another order.

The plan is to pay as much as you can on one account while paying the minimum on all other accounts. Ideally, you’ll find ways to free up more cash in your budget (more on that below), but to start, work with what you have.

4. Stop creating debt

You will never get out of debt if you continually increase your balances. Keep your credit cards in a drawer, or even freeze them in a block of ice, but don’t close accounts because that will hurt your credit score. Don’t apply for more loans so you don’t have the ability to create additional debt.

New debt increases the payments you need to make, putting additional pressure on your monthly income. It’s hard to live without credit cards when you have no money, but if you really want to get out of debt, it’s critical that you find a way to live off your income.

5. Look for ways to reduce your expenses

Don’t guess. Check your monthly bank statements to see where you spend money each month. For every purchase, seriously ask yourself if this is an expense you can live without. Remember, you’re not cutting costs for no reason.

You’re doing it so you can get out of debt. It is a worthy goal. You may have to make some temporary sacrifices, but you can add expenses back once you’re debt-free if you decide those expenses are worth it.

6. Increase your income

Earning more money accomplishes two goals. First of all, you no longer have to rely on your credit cards to make ends meet.

Second, you will have more money available to pay off your debt. You can increase your income by taking a second job, doing freelance work, selling things on eBay or Craigslist, making money with a hobby, doing odd jobs, or starting a small business.

7. Ask your creditors for a lower interest rate

A high interest rate makes it harder to pay off your debt because more of your monthly payment goes toward interest charges. Lowering your interest rate lowers the monthly interest you pay and allows you to pay off your debt faster.

A good credit score and positive payment history give you more leverage to get a lower interest rate. If your credit card issuer won’t budge, consider transferring your balance to a credit card with a lower interest rate. Taking advantage of a 0% balance transfer offer is even better.

8. Pay on time and avoid fees

Late payments slow down the progress of paying off your debt. You’ll have to double payments next month and pay a late fee, money that could have lowered your balance. Also, two late credit card payments in a row will trigger the penalty rate, which will also make it harder to pay off your debt.

9. Consider consumer credit counseling

A credit counseling agency can work with you to review your finances and develop a budget that may include monthly debt payments. If you can’t afford your debt payments, the credit counselor will try to work out a debt management plan (DMP) with your creditors.

The DMP will often include lower monthly payments to your creditors, and you may be able to make a monthly payment to your credit counselor, who will then distribute the payments to each of your creditors.

If your situation and ability to pay your debts are more complicated, you might consider seeking help from a debt relief program.

Seeking debt settlement is a last resort because it involves stopping payments and working with a company that holds that money on escrow while you negotiate with your creditors to reach an agreement, which can take up to four years. Withholding payments from your creditors can seriously damage your credit score.

10. Take one step at a time

Looking at the big picture of your debt can be overwhelming, but remember that you’re not going to tackle it all at once. By concentrating on one debt at a time, your debt repayment process will be more effective. Track your progress, celebrate your successes, and keep working until your debt is fully paid off.