Being in debt sucks. I know, because I’ve been there.
The good news is you can get out of debt. And, if you put your mind to it, you can be debt free faster than you think. In this guide, I’ll share the debt repayment strategy that worked for me. I’ll also point out some other debt repayment methods that I didn’t personally use to get out of debt, but that might be helpful to you.
Make a debt repayment strategy
If you want to get out of debt, the very first thing you need to do is to confront your debt — honestly and without judgement.
It’s harder than it seems. In my early twenties, my multiple debts were steadily mounting. I knew I was in trouble, but I was too scared to actually tally up how much I owed. I made my minimum payments, then I tried to forget about my debt altogether until the following month.
Create a debt inventory
To confront your debt, I want you to make a list of everything you owe. For each of your debts, in whatever format works for you (a note on your phone, a spreadsheet, or with pen and paper), write down:
- Everywhere you owe money
- Your current balance and credit limit
- The interest rate
- Your minimum monthly payment
It’s a scary exercise; I know. But there’s something powerful about taking even this small step. Do your best not to let this exercise lead to any kind of self-judgement. The circumstances that created this debt don’t matter. This is what’s real today. And that’s all that matters. You are not your debt, and your debt is not you.
You can overcome these debts. It will take work. And a lot of patience. But you can do this. You’ve already taken the first step.
Calculate your debt-to-income ratio
For bench-marking purposes, you may also want to take this time to calculate your debt-to-income ratio.
Banks use this statistic as a factor in making lending decisions. A lender will total your monthly debt payments and divide it by your gross (pretax) monthly income.
For example, if you:
- Earn $5,000 per month,
- Have a $800 car payment,
- $1,000 in student loan payments,
- And your minimum credit card payments add up to $300,
your debt-to-income ratio is 42%.
As a rule of thumb:
- Over 40% is the “danger zone”
- 30% to 40% is higher than desirable
- 20% to 30% is manageable
- Less than 20% is ideal.
Prioritize your debt repayment
Now that you have a list of your debts, it’s time to decide how you will attack them.
There are two ways to go about this: The debt snowball method and the debt avalanche method.
The debt snowball method, as popularized by Dave Ramsey, instructs you to first pay as much as you can toward your smallest debt. When that debt is paid off, you take all of those monthly payments and put them toward your next biggest debt. And so on.
The debt avalanche method, by contrast, tells you to first pay as much as you can toward your debt with the highest interest rate. When that debt is paid off, you take all of those monthly payments and put them toward your debt with the highest interest rate. Etc.
The debt snowball method is motivating because you can celebrate paying off a debt faster.
The debt avalanche method will save you the most money because you’re prioritizing debts with the highest interest rates.
I don’t think there’s a right answer here; choose a debt payoff method that feels right to you.
Consolidate or refinance high interest debt
Before you execute your get out of debt strategy, it’s worth looking at whether your can refinance any of your debt or whether a debt consolidation loan would be helpful.
Personal loans
A personal loan can help you both save money on interest (if you qualify for a lower rate) and simplify your debt repayment by consolidating multiple credit card balances into one monthly payment.
That said, it can be hard to qualify for a personal loan if your credit reports aren’t in good shape.
You can check your credit report for free. Also, it’s easier than ever to see if what kinds of debt consolidation loans you qualify for (with no impact on your credit report).
Personal loans are best for credit card debt or existing debt balances. Debt consolidation loans may charge origination fees, but interest rates tend to be a bit lower than credit cards. You can use our loan payoff calculator to estimate your monthly payments and how long it will take you to repay a debt consolidation loan.
Home equity loans are another option to consolidate all your debts in one place. To qualify for a home equity loan, you’ll need both good credit and enough equity in your home.
If you have student loans or an auto loan, refinancing could also be an option.
Balance transfers
If maxed out credit cards are your problem, a balance transfer card may be able to help you pay off debt faster and save you money with a lower interest rate.
Balance transfer credit cards offer 0% interest for up to 2 years on balances you transfer from other credit card accounts. Most balance transfer cards charge a fee — between 3 and 5 percent of the credit card balance you transfer But, usually, the money you save on interest far exceeds the cost of this fee.
Only attempt to get a balance transfer card if you have good credit and if you can trust yourself to destroy or not use your existing credit cards after the balances are transferred.
» MORE: How balance transfer credit cards work
Refinancing
Due to rising interest rates, refinancing opportunities are less plentiful today. If, for example, you got a car loan at a very high interest rate (perhaps because you had bad credit at the time), you may be able to refinance your auto loan at a lower rate. The same goes with student loans.
Student loans
Paying off student loans can be be especially tricky. Federal student loans usually cannot be reduced or forgiven in bankruptcy. And not all loans are eligible to be refinanced.
If, however, you have private student loans and good credit, there are student loan refinancing options to consider. You may be able to refinance student loans to get a reduced interest rate. But you may also be able to refinance your student loans over a longer period of time. Doing this will reduce your monthly payment but increase the total interest you pay over the life of the loan.
» MORE: Student loan consolidation and refinancing guide
Auto loans
Many people don’t know this, but it’s possible to refinance an auto loan. This can be especially helpful if you took out the car loan when you didn’t have great credit and, consequently, got stuck with an unfavorable interest rate.
Keep in mind, it’s not advisable to extend the length of your auto loan.
If you do end up trying debt consolidation or refinancing, it’s important that you destroy the credit cards that you pay off with the loan. You don’t want to undo all of your debt payoff progress by racking up new credit card debt with the recently paid-off cards!
Save money for extra payments
Here’s where the journey to get out of debt gets more difficult. To repay debt faster, you need to do two things:
- Stop taking on new debt (pay cash for everything!)
- Put more money toward your monthly bills
Finding the extra cash to to make more then the minimum payment on your debts can be tricky, I know.
This is where some good, old-fashioned budgeting can be helpful. Yes, it might mean saying “I’ll see you later” to some places you currently enjoy spending money. But the hard truth is that you have a choice to make: Get out of debt, or keep on living your current lifestyle.
A simple budgeting spreadsheet can help you get your finances in order.
Alternately, there are a number of great budgeting apps — some free, some that cost a few dollars a month. If one of them helps you reign in your spending habits and making progress toward your debt repayment; it’s probably worth it.
Also, use the majority of any windfalls to pay off debt. Getting a tax refund, inheritance, lottery prize, or bonus is a great opportunity to make a big debt in your debt.
I can’t overstate the importance of putting extra funds toward your debt repayment.
For example, if you have a $15,000 personal loan at a 5% interest rate and minimum monthly payment of $300, it would take you over 4.5 years to pay that balance off. If, however, you increase your payment to $500, you’d pay that loan off in 2.7 years.
Earn more money
Getting out of debt (and doing it on your own), not only requires you to live within your means, but to live below it. Put another way: you need to go from a situation in which you’re spending more than you earn into one where you’re earning more than you spend. And the faster you want to become debt free, the more you have to earn above and beyond what you spend.
Personally, I knew I was never going to get out of debt just by cutting spending unless, perhaps, I lived with my parents until 35. (No offense, Mom and Dad, but no thanks.) I simply didn’t earn enough money. I had to earn more.
So, I did several things:
- I got a second job (at Starbucks — it was actually some of the most fun I’ve ever had at work)
- I looked for higher paying “day jobs” and moved (a couple of times)
- I launched websites, including this one
Between the second job, a career change, and starting websites, I added $15,000 to my annual income fairly quickly. And, in about four years, I went from earning just over $30,000 (in 2005 dollars) to making over six figures.
It wasn’t an overnight success story. But, here’s the thing: There’s no such thing. Short of winning the lottery, improving your financial standing takes discipline and time. There are no shortcuts!
I do not say this to brag or to claim that I’m anything special. I say it only to make a point. If you put your mind to it, you CAN get out of debt. If you put your mind to it, you CAN increase your income. If you put your mind to it, you CAN get a better job. If you put your mind to it, you CAN start a part-time business.
Not everybody has to earn more money to get out of debt, but it makes it a lot easier.
Ideas to earn more money
There are literally endless ways to earn extra money, but all could fall into these three categories.
- Sell stuff.
- Work harder.
- Work smarter.
Sell stuff
If you have STUFF, then you can make money. Find stuff you don’t use anymore and hit up eBay or Craiglist or a yard sale. The good thing about selling stuff is you can get cash fast. The bad news is it’s not sustainable; sooner or later, you’re going to run out of crap to sell.
Work harder
Get a second job or work overtime, if available. I’ll be blunt, second jobs are no fun. Think of how tired/stressed/soulless you feel after your 9-5 already, now imagine getting in your car, battling rush hour traffic, and putting in another four hours from 9-10. Then you get home around 11, just in time to scroll TikTok for an hour and pass out. Putting in extra hours earns extra dollars, but it can suck the life out of you. If this is the route you want to go, however, there are options: food service, babysitting, mall stores, delivery routes, security guarding, tutoring, teaching prep classes, bartending, cab driving, etc.
Work smarter
This is my personal favorite way to increase your income, and you’ll see why. Working smarter is about getting promoted at work. Or, if your job won’t promote you: finding a higher-paying job. Or, if you can’t find a higher-paying job: working for yourself. If you make the decision to earn more money by working smarter, you just have to DO.
Where to find help getting out of debt
Part of taking the steps necessary to get out of debt is admitting when you need help. Although you can save money by getting out of debt on your own, sometimes it just doesn’t work. That’s where the following resources may be helpful.
Just PROCEED CAREFULLY. Although the government has cracked down a bit in recent years, there are a lot of companies out there that advertise these kinds of services that will only make matters worse. AVOID any service advertising “debt settlement” or that promises to reduce the total amount you owe. AVOID any service that charges big upfront fees.
Credit counseling organizations
A credit counseling organization can work with you individually on money management and debt reduction skills.
A legitimate, non-profit credit counseling organization can help you make a plan to get out of debt for a modest monthly fee.
Introductory counseling can be free but may involve an enrollment fee or a monthly fee afterward depending on the help you need. Most agencies create free debt education materials; however, other services like debt management and repayment plans must be paid for.
Working with a credit counselor individually won’t have an impact on your credit score. Sometimes, however, credit counselors set up debt repayment plans for you that involve negotiating with your with your creditors so that you can pay less than the minimum payment while you focus on paying off other debts. This can be reflected on your credit report and — possibly — negatively impact your credit score.
Visit The National Foundation for Credit Counseling to learn more or find a credit counseling agency to work with.
Debt relief services
You may also want to research (either through your counselor or on your own) entering a debt management plan. Debt management plans may be offered by a credit counseling organization. They may also be marketed by companies that do not profit bona fide credit counseling.
Under such a plan, a third-party company negotiates interest rates, payment amounts, and fees with your creditors. You make one monthly payment to the third-party company and they pay all your creditors.
Be sure to do more research if this is a route you want to go.
Debt settlement
You may also see ads for debt settlement companies.
These companies contact your creditors and attempt to negotiate the amount you owe. For example, if you owe $10,000 to Bank A and $5,000 to Bank B, a debt settlement company may be able to get Bank A to agree to settle your debt for $6,000 and Bank B to settle your debt for $2,000.
When you work with a debt settlement company, you must pay a significant fee — either a fixed dollar amount or a percentage of the amount by which they reduce your debt.
Two problems with debt settlement companies are that:
- Many creditors will only reduce the amount you owe on a debt if you can pay the reduced amount, in a lump sum, within 30 days.
- Your credit report may reflect the fact that you did not repay your original balance in full. This can have a detrimental impact on your credit score.
Bankruptcy
Bankruptcy has the potential to reduce or wipe out all your debts, but comes with significant downsides.
When you declare bankruptcy, a court-appointed trustee will inventory all of your debts and assets. You will be forced to sell any non-protected assets and the proceeds will go toward reducing your debts.
You get to keep exempted assets that include one car, your primary residence and its appliances and furnishings, and any tools you need for work. Retirement savings such as your 401(k) may also be exempt.
A bankruptcy will stay on your credit report for up to 7 years, during which time it will be difficult to obtain new credit.
You must pay an attorney and court fees to declare bankruptcy. Depending on your financial situation, you may also be responsible for making reduced monthly debt payments, according to your means, for 5 years. Finally, in most cases student debt is not dischargeable in bankruptcy.
Summary: How to get out of debt
Living with too much debt is stressful, but becoming debt free is an incredibly worthy goal.
Sometimes, I feel like I lost my entire 20s to my debt. But, during those years, I also worked incredibly hard to become debt free before my 30th birthday. It’s one of the most satisfying things I’ve ever done.
Paying off debt requires dedication and patience. Whichever debt repayment method you use, it’s critical to keep an eye on your spending habits throughout. I don’t know how many times I would make progress on my debt only to take two steps back by overspending a few months later.