Getting out of debt takes work and smart money management, but it doesn’t have to be complicated; you just need to create a plan and have the discipline to stick to it. You don’t necessarily need to pay off all your debt immediately. Instead, focus on spending less than you make and use the following five steps to work toward a debt-free future.
1. Make a list of all your debt.
Start by listing all your debt, including credit cards, student loans, and any other financial obligations, along with the interest rates, where applicable. Verify your list against a recent credit report if you have one. Or visit AnnualCreditReport.com for information on how you can obtain a free credit report from each of the three nationwide consumer credit reporting companies.
If you’re in a situation where you’re facing significant debt, you may want to consider confiding in family and friends to get the emotional support you need in order to achieve your goal.
2. Prioritize your payments.
Choosing to dedicate your finances to the first debt on your list won’t give you the motivation and savvy to pay off all your debts. You should prioritize your payments by focusing on the debt with the highest interest rate. A higher interest rate means that you’ll have to pay more over the life of the loan.
Student loans generally have a lower interest rate than credit card debt, but this will vary depending on your loan agreement. Refer to your contract or contact your loan servicer to find out your interest rate if you are not sure.
Once you know which account is charging you the highest interest rate, pay as much as you can toward that debt while still making at least the minimum payments on any other credit cards or loans. If you don’t have much flexibility with your budget, start by putting an extra $25 or $50 a month toward the debt. After a few months, gradually increase the extra payment and you’ll get used to not having the cash to spend. After you pay off a loan, focus the extra payments on the next highest interest rate, and so on, until you’ve paid off all of your debts.
3. Ask for a lower interest rate.
It may be worthwhile to simply ask your creditor if you qualify for a lower interest rate. If you’ve consistently made minimum payments or have exhibited good credit behavior, lenders may be willing to negotiate a lower rate.
According to CreditCards.com, a part of the Bankrate Online Network, nearly nine out of 10 credit card holders who asked their credit card companies to waive a late payment fee were successful, and about two-thirds who asked for a lower interest rate were approved.
If you do succeed in lowering your interest rate, consider applying that extra money straight toward paying off the debt on that card. You’ll be able to ditch your debt even faster.
4. Monitor your spending.
Many people use their salary as an excuse for their debts. But you don’t have to make $80,000 a year to pay off your debts, nor should you wait for the end-of-year bonus.
Instead, track your spending each month. After a few months, it will be clear where you spend most of your cash. At that point, it’s up to you to cut back on your spending and put that money toward your debt. If your budget is already tight, consider getting a part-time job or freelance assignment in order to accelerate your debt reduction.
5. Put extra cash toward your debts.
A $20 birthday check doesn’t seem like much in the long run, but if you make a commitment to pay down your debts with any unexpected cash, it will add up. Gift money, work bonuses, or cash back from credit card purchases can help you take one more step toward living debt free.
Getting out of debt is the first step, but after that, you need to invest in your career. Your financial security doesn’t depend on interest rates; it depends on how much you can earn and save for your future. Consider the skills you need to develop to move ahead in your work, and then set career goals as well as saving goals.
Ilyce Glink is the author of over a dozen books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In! Her nationally syndicated column, “Real Estate Matters,” appears in newspapers from coast-to-coast, and her Expert Real Estate Tips YouTube channel has nearly 4 million views. She is the managing editor of the Equifax Finance Blog, publisher of ThinkGlink.com, and owner of digital communications agency Think Glink Media. In addition to her WSB radio show and WGN radio contributions, she is also a frequent guest on National Public Radio. Ilyce is a frequent contributor to Yahoo and CBS News.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.