Credit

How to Get Out of Debt

Andrea Coombes

Written by Andrea Coombes
Edited by Carolyn Kimball
Fact-checked by Dayana Yochim

December 21, 2022

There are a lot of different ways to fall into debt — hello, shiny pretty must-have items at the check-out register — but there are a handful of tried-and-true methods for climbing back out of that hole.

In this article, we’ll go over a step-by-step process for getting out of debt. We’ll dive into each of the following topics in detail:

  1. Get to know your debt
  2. Track your spending
  3. Pick a debt repayment strategy
  4. Consider other helpful strategies
  5. Call in the experts

But first, a pause for a pep talk: While getting out of debt can take time and perseverance, just think what you’ll be able to do once all that money that’s currently going to pay interest on your debt starts going, instead, toward your amazing life goals. A month-long vacation in Buenos Aires, anyone? 💃

And remember: Getting out from under debt isn’t only about working towards your longer-term goals. The elephant in the room here is your credit score. Too much credit card debt can ding your score, and falling behind on payments will trash your credit. Check out our story on why credit matters.

OK, let’s deal with this debt, shall we?

1. Get to know your debt

Before you can deal with a challenge, you have to face it. With debt, that means listing on paper, spreadsheet, papyrus — whatever works best for you — all of your debts, including each credit card account, the car loan, any accounts you’re currently making payments on. Without knowing the details of your debt, it’s impossible to pick the best strategy for moving forward.

Here are the details you want to list:

  • Name of creditor, e.g. “Chase Visa”
  • Total balance owed
  • Interest rate
  • Minimum monthly payment (this may vary each month; just use whatever the current or most recent minimum payment is)

To make this not-fun task a little easier, consider giving a nickname to each debt, something that makes this whole process more palatable. Maybe that one Visa card, for instance, should be nicknamed “Monster” or “Beast,” a loving little reminder that it’s got the biggest balance and you’re ready to slay it.

investor.com Quick Tip: Three motivating resources on the “pay off debt” journey

The debt repayment journey is incredibly rewarding, but not always easy. Consider tapping into one, two or all three of these resources to help you on your way:

  1. ✅ Talk to a friend about being an accountability partner. Do you have a friend with debt? Maybe you two could set up regular check-ins to talk about your debt repayment efforts and support each other
  2. ✅ Check out powerpay.org. It’s a nonprofit website that helps people develop their own personal debt payoff plans. You can create your own account for free.
  3. ✅ Do an online search for “debt repayment calculator.” Choose a calc, and enter your loan balance and interest rate. Then play around with your entry for “monthly payment” to see how raising that dollar amount can shorten the lifespan of your debt.

2. Track your spending

Yes, this is an article about debt, but here’s the thing: It’s really hard to get out of debt —and stay out — without either a) winning the lottery or b) taking a look at where your money is going each month. Hence, this brief foray into a discussion about spending.

The good news is you don’t have to track your spending forever. OK, yes, we know some of you actually like tracking your spending and do it religiously and we are in awe. For the rest of us, the fact that it’s not forever is good news. Understanding where your money is going over the course of even just one month will do a lot to help you figure out how to get out of debt.

Why is tracking your spending such a powerful tool? Because it forces us to see what we’re spending money on, how much we’re spending and where the wiggle room is to free up some extra cash to — dramatic pause — pay down debt. (See? It’s all related.)

Because here’s the thing: When it comes to money, many of us walk around with an idealized version of ourselves. If asked to estimate how much we spend on say, groceries, eating out, or Amazon purchases, we’ll come up with a number and think we’re pretty close.

Yeah. Not so much.

Here’s your to-do: Take a month and write down Every. Single. Thing. you spend money on. Or, use an app like Mint or any number of other budget-tracking apps out there. When the month is over, add up your spending by category.

investor.com Quick Tip: About those budget categories

Use whatever categories work for you. For one person, the categories could include “groceries,” “eating out,” “clothes,” and “Amazon,” while someone else might be more apt to use “food” and “online shopping.” There are no wrong answers.


That said, separating out categories where you might be overspending can help you see that more clearly (e.g., “food” could be separated into “groceries” and “eating out” if you think those takeout meals might be adding up fast). It for sure can help to download a budget spreadsheet or use a budget app. An online search for “best budget apps” brings up articles that detail the pros and cons of many different budget tools.

By the way, during this exercise continue to pay at least the minimum monthly amounts on your debts (and if you’re struggling to do that, hop on down to No. 5 below to see about checking in with a consumer credit counselor).

After a month has gone by and you’ve tracked your spending, it’s time for your spending close-up. The key here is looking at your discretionary spending. Discretionary spending is when you buy things that you don’t really need. It might be mixed in with necessities. Like, you need to buy groceries, but did you need to buy those eight deluxe-sized tubs of Ben & Jerry’s? (Of course you did. No judgment here.)

investor.com Quick Tip: Necessary vs. discretionary expenses

One way to save the most money, fast, in a monthly budget is to reduce costs for one of the three basic essential or necessary expenses: housing, food or transportation. If you can save $400 a month by moving to a cheaper apartment, that could be a game-changer in how fast you pay off your debt. But… are you going to move to improve your debt outlook? It’s unlikely. All of which is to say: If you can shift some major expenses, more power to you! But if you can’t, then focus on those discretionary expenses that are easier to control.

It’s important to keep in mind there’s no right or wrong way to spend your money. If you want to spend your money on that thingamajig [fill in with name of that thing that you don’t really need here], we’re not here to tell you not to do that.

The trick is to figure out how to spend your money in such a way that you’re both buying the things you need and want right now — and also able to save for longer-term goals, including paying off your debt.

investor.com Quick Tip: It’s OK to save money while you’re in debt

You might have heard you’re supposed to put every extra dollar towards high-interest-rate debt like credit cards. That advice comes from a good place — those interest rate charges are hugely expensive and you want to get out from under them as fast as possible. But, we’re human, and it can be a yearslong slog to get out of debt. It’s smart to tap into some good feelings to help carry us along. One way to do that? Start saving a little bit every month. Even if you have debt, set aside, say, $5 a month — it’s OK to start small! — in a savings account (here’s our rundown on some great high-yield accounts). That’s going to feel good, and that feel-good feeling will help motivate you to get your debt paid off so you can save even more.

3. Pick a debt repayment strategy

There are different ways to approach the question of: Which debt should I pay down first? (If you have only one loan or credit card with a balance, feel free to skip past this section.) Two of the most popular methods are the debt snowball and the debt avalanche. Please don’t ask us why snow plays such a large role in the world of debt repayment. No idea.

Debt snowball method

A debt snowball is when you:

  • Pay all of your minimum monthly payments on all of your debt.
  • Pick the smallest balance debt, and throw any extra money to that debt.
  • Once that smallest debt is paid off in full, take the money you were putting toward that one, and throw it at the next smallest debt. And on and on…

The reason the debt snowball method works so well is that you get the really good feeling of wiping out an entire balance in the fastest way possible. You go from, say, six “must pay” bills down to five, and so on. That feel-good moment of paying off a debt can help keep you motivated on what can be a long road to getting all of your debts paid off.

The magic of the debt snowball method is that it embraces human psychology. However, it is not the best approach in terms of saving money on interest charges. The absolute best way to pay down debt, from a financial, spend-the-least-money possible perspective, is to put as much money as possible toward the debt with the highest interest rate. That is not how the debt snowball works. But this is how our next debt repayment strategy rolls. Or maybe we should say slides…

Debt avalanche method

A debt avalanche is when you:

  • Pay all of your minimum monthly payments on all of your debt.
  • Pick the balance with the highest interest rate, and throw any extra money at that debt.
  • Once that account is paid off, direct all of your extra money at the next-highest-interest-rate debt. And on and on…

The debt avalanche method is the method your aunt would recommend if she were an economist. You pay off your debt in the most utilitarian way possible by throwing any and all money that you can spare toward paying down the highest-interest-rate debt. This approach saves you the most money on your debt-repayment journey.

There’s no doubt that you will spend less money on interest payments using the debt avalanche method than you will with the debt snowball. That is, you will save money if you avalanche your debt. But when you, a human being, are looking at a multiyear effort to pay off all your debt, sometimes those psychological wins of knocking out some debts as fast as possible can be really important, even if you do end up paying more in interest over time. Only you can decide which approach makes the most sense for your brain and budget.

4. Consider other helpful strategies

If you’ve freed up some extra cash in your budget to allocate toward your debt, and you’re ready to give either the debt snowball or avalanche a go, then great! You’re good to go. Or, you could consider one or more of the below strategies, in addition to or instead of the snowball or avalanche approach.

Consolidate with a personal loan

With a personal loan, offered through banks, credit unions and online lenders, you can consolidate a number of debt payments into one fixed monthly payment.

Pros

  • One monthly payment simplifies your life.
  • The loan has an end date, unlike credit card debt, which helps motivate you by keeping the end in sight.
  • Personal loan interest rates can be lower than credit card interest rates.

Cons

  • Generally, you’ll need a good credit score to qualify for a personal loan.
  • It may be tempting to start using those old credit cards again, now that they have a $0 balance. It’s absolutely imperative you don’t build up new credit card debt after consolidating with a personal loan; combining the personal loan monthly payment with credit card monthly payments is a pretty sure road to trouble ahead, like, potentially, bankruptcy.
  • Applying for a loan will usually result in a hard inquiry on your credit report (but paying off credit cards and making on-time payments to a personal loan can help your credit).

Move debt to a 0% balance transfer card

You might be able to move some or all of your credit card debt over to a 0% interest balance transfer credit card.

Pros

  • A 0% balance transfer gives you time — 12 to 21 months, usually — to make a dent in your debt, because you’ll be making payments without having to pay interest.
  • This is ideal if you have a debt balance that you know you can pay off in the 0% interest period. It’s also very motivating to have that deadline (once the 0% period ends, interest will start to accrue).

Cons

  • You’ll need a good credit score to qualify for a balance-transfer card.
  • There’s usually a one-time balance-transfer fee, typically about 3% to 5% of the amount you’re moving onto the card (still, the interest savings may make the fee worthwhile).
  • You may be tempted to start adding new charges to the old credit cards, which is not the best idea. (Remember that spending plan we talked about? Try to stick to it.)
  • The balance transfer card may charge interest on purchases (with these types of cards, it’s best to focus on getting your debt paid down and resist using them for new purchases).
  • If you miss a payment or pay late, you may lose your 0% promotional rate and be subject to a punishing “penalty APR,” also known as a very steep interest rate.

Ask for a hardship plan

Some credit card issuers will offer hardship plans, in which they’ll work with people who are experiencing financial difficulties, to ensure that some or all of the debt gets paid back. The terms of a hardship plan may include a lower interest rate, usually a fixed monthly payment and a set term, such as two to five years. Typically, the credit card issuer will close the card account as a prerequisite for entering into the plan. That means no more charging purchases on it.

See if you can find info about hardship plans on your lender’s website (some credit-card companies list a phone number to call). If there’s nothing on the website, call the general customer-service number, say that you want to ask about a hardship plan, and then be prepared to get bounced around a bit.

Be prepared to negotiate, politely, with the lender. It helps to come prepared to tell your (true!) story about your financial difficulties, and to have a clear idea of how much you can afford to pay per month. Have your spending plan/budget in front of you to keep you focused on what your max monthly payment is.

investor.com Quick Tip: Your hardship plan script

Here’s an abbreviated example of what you might say when requesting a hardship plan:


Hi, I’m calling today because I’m having money trouble. I recently got divorced, and thus am paying double the monthly rent I used to pay. I’m struggling to pay all my bills, and I would like to find out about entering into a hardship agreement. I have focused on eliminating all discretionary spending out of my budget, and I’ve figured out that I can pay a total of $100 per month on this debt.


Often the lender will come back with a proposed payment plan, including a specific interest rate, monthly payment amount and term (say, two years). If what they suggest feels undoable, be sure to say that. I really appreciate your working with me on this debt. Unfortunately, based on my current budget, I can’t afford that monthly payment. My maximum monthly payment is $100. The lender may be willing to work with you, or not. You’ll have to decide if the offer works for you.

Some pros and cons to consider with hardship plans:

Pros

  • These plans generally come with a lower interest rate on the debt, and a fixed monthly payment, which can make the get-out-debt life a lot smoother.

Cons

  • Getting approved will depend on your history with the lender, your current situation, and the lender’s own policies.
  • A hardship plan usually requires closing the account, which can hurt your credit score.
  • The credit card company may add a note to your credit report that says the account is in a hardship plan, which potentially could hurt your credit. Still, if you’re struggling to make payments, a hardship plan could be better for your credit than a number of missed or late payments. And making consistent on-time payments to the hardship plan should help your credit.

Enroll in a debt management plan

If you go to a consumer credit counselor (more on that below), they may well suggest you enter into a debt management plan (DMP). With a DMP, the credit counselor negotiates with your credit card companies to reduce your interest rates and eliminate late fees that might have inflated your balances if you’ve been struggling to make payments. You then pay a set monthly fee to the counseling agency, and they pay your creditors on your behalf.

These plans generally work best for folks with a lot of credit card debt that they’re falling behind on. If, on the other hand, you’re on top of your payments and have room in your budget to continue making payments, the credit counselor may advise against a DMP, due to the fact that you have to close the accounts that are entered into the plan, and the creditors that agree to enter the plan with you may even demand that you close any other credit cards that aren’t enrolled in the plan.

Some pros and cons to consider with hardship plans:

Pros

  • You end up with one fixed monthly payment and a set timeframe for paying off the debt, simplifying your debt-repayment plan.
  • The counselor usually negotiates lower interest rates on your debt on your behalf, which makes it easier to get the debt paid off faster, at less cost to you.

Cons

  • You must stop using your credit cards and usually can’t open new ones while you’re in the DMP (though, really, maybe this is a “pro” as you work on dealing with debt).
  • Your credit score is likely to go down, at least temporarily, while you’re on the plan. (While the regular monthly payments should eventually help your credit; closing your accounts likely will hurt your credit because it hits your credit utilization ratio — that is, the amount of your outstanding debt as a percentage of your available credit.)
  • There often are enrollment and maintenance fees for the plan.

investor.com Quick Tip: Be wary of debt settlement companies

Getting out of debt can be hard — it’s a long, slow process. And that makes it oh-so-appealing to look to others for help. But proceed carefully here. Debt settlement companies will charge fees and their strategies can really mess up your credit. Before you go down that path, meet with a nonprofit consumer credit counselor to see what they suggest. See below for where to find one.

5. Call in the experts

If all of this is just too much to handle, then consider reaching out to a nonprofit consumer credit counselor.

A consumer counselor will work with you to assess your situation, including creating a budget and working with you to figure out how to best handle your debt. They might suggest a debt management plan, in which the counselor negotiates with your credit card issuers to come up with a payment plan that works for you. Here are some resources to find a consumer credit counselor:

There’s no question that dealing with a lot of debt can be overwhelming. A consumer credit counselor might be just who you need to develop and stick to a plan.

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About the Editorial Team

Andrea Coombes
Andrea Coombes

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.


Carolyn Kimball
Carolyn Kimball

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money


Dayana Yochim
Dayana Yochim

Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.


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