How to Get Out of Debt: Debt Consolidation Advice

Mounting debts can undermine borrowers’ well-being and derail life plans. The metaphors commonly used in describing overwhelming debt – quicksand, a prison sentence, overwhelming burden – paint a bleak picture. It can seem like the situation will never end.

But take a deep breath. There are approaches and solutions for the situation.

First, remember that not all debt is negative. Good debt, called leverage, is money borrowed to finance an appreciating investment. Home mortgages usually are good debts since the value of your property tends to increase as your mortgage shrinks. Student loans should fall in this category — if you can earn a college degree and turn that diploma into a well-paying job.

It’s “bad debt” that gives the phrase a bad name. Bad debt can quickly grow from annoying to nuisance to monster.

Credit card debt is far and away the most common bad debt. Auto loans are a close second. Gambling, vacations, and weddings are three more sources of bad debt – and credit cards usually are involved in all three.

Using plastic to make purchases is so easy and paying the minimum balance each month requires so little effort, that bad debt piles up. Before you know it, interest payments become so huge that you’re spending most of your paycheck on finance charges.

The question becomes what to do if you get caught in the debt vice. The most important step is to figure out how much you owe and what you can do to eliminate it.

Here are five steps anyone drowning in debt should take to relieve the burden:

• Assess your current debts.
• Make a budget.
• Track your spending.
• Earn more money.
• Stop using your credit cards.

These are all good habits that take time and discipline but are necessary if you’re serious about eliminating debt.

1. Assess Your Current Debts

Understanding how and why you got in the predicament you are in is the first step to getting out of debt. If your debt load is too heavy, you need to grasp how it happened.

List all your expenses from the previous month, add them up and compare them to your income. The goal is to make the two columns balance and eventually tilt in favor of income over expenses. If you can’t make that happen, ask yourself why?

Does the spending list show a lot of trips for fast food, restaurants, and specialty coffees? Or does it show money going to doctors and medical emergencies? Are there divorce costs? What about home repairs?

Evaluate where you are spending your hard-earned money and use the list as an opportunity to gain insight into your spending habits. When you understand your relationship with money, you can make moves forward.

Honest assessments produce real answers.

2. Make a Budget

Creating and sticking to a budget is one of the surest ways to help you get out of debt.

Drawing up a budget is not nearly as difficult a task as many make it out to be. Even with a budget, you can still go out to dinner and a movie or play a round of golf with friends or go to the beach for a weekend. You just have to account for it, and if necessary, cut back in other places.

A good budget summarizes your spending at the end of every month and helps you identify areas where money was wasted. You often will be surprised at where you spend the money and how much you spend on items you could easily live without.

The purpose of a budget is to give your money a direction and a purpose. The budget sets spending goals for needs like rent, utilities, groceries, and transportation while at the same time accounting for spending on “wants” like clothes, dining out and entertainment.

The best budgets are flexible enough to allow you to make changes from one month to the next so that less money is wasted, and more money is directed to reducing debt.

If you’re not confident in your ability to start a budget, try credit counseling from a nonprofit organization. They offer free advice on how to start and stick to a budget.

3. Track Your Spending

The easiest approach to tracking spending is to go back over bank and credit card statements for the past 30-60 days. If you have receipts for cash expenditures, include them as well. If you don’t, start saving them to make sure you know what you spent and where.

Then categorize them in simple ways. Utility bills, cable, going out to eat, fun stuff – however you want to list them. You also could do things as simple as listing utility bills and the mortgage under “needs” because those bills must be paid. Fun stuff and restaurants could be under “wants.”

Then simply add up what went where. It won’t take long to find out where you are spending unnecessarily.

4. Earn More Money

There are three routes to a positive cash flow: Spend less, earn more or do both. Not all cash problems occur because you spend like a proverbial drunken sailor. Sometimes you end up earning less than you did in a prior job and you can no longer keep up with your costs.

The easiest way to improve your finances is to add to your income, though figuring out how to do that can be a challenge.

Finding a new job that pays more is one way, but in most cases, that’s a lot easier said than done. Adding a second job can help. This might not be easy. Working more hours, or even going through the motions of looking for work when you’re comfortably employed requires discipline and effort.

Start by asking your boss about overtime opportunities. If they aren’t available and you want to stay where you are, think about skills you have that might make extra income. If you’re an amateur plumber, maybe you could fix leaky pipes in your neighbors’ homes. Or if you waited tables when you were in school, perhaps you could find restaurant work part-time on the weekend. The possibilities are not limitless, but there are enough to help formulate a plan.

Another short-term fix is putting extra things around the house up for sale. If you have an attic or garage filled with unused items, consider a garage sale or selling things individually on Craig’s List or eBay. This might not help your long-term income but could give you a short-term boost to provide money that could be used to pay off a credit card balance.

The goal here is developing an extra-income source that will help you pay down debts, avoid new debts in the future and save enough for a cushion to cover emergencies and unforeseen setbacks like a job loss.

5. Stop Using Your Credit Cards

One of the most dangerous debt spirals is overusing credit cards. High interest rates increase the total amount owed, sometimes exponentially. This is true especially if you are only making minimum payments.

If that is your approach, the credit card companies have you right where they want you: Stuck in a spiral of growing debt.

Continuing to use credit cards when you are in debt exacerbates your debt challenge. It also can lead to serious financial issues.

Consider a credit card that charges 18% interest per month – the average rate in 2022 – and you have $3,000 charged on a card and are only paying a $30 minimum payment (numbers are examples only). Even if you never use the card again, if you make only the minimum payment every month, it will take 10 years to pay that $3,000 because interest will continue to accrue on the balance.

The best solution: Stop using credit cards while you whittle away at your debt. It makes no sense to add to burdensome debt by putting more debt on your credit cards.

Show discipline. Stop using the cards. Concentrate on paying down the debt.

6. Change Debt-Enabling Habits

A habit by definition is hard to break.

Overspending easily can become a habit. It’s easy to pull the credit card out of the wallet or to click “make payment” online or while watching a TV shopping network. In some ways, it doesn’t really feel like you’re spending money until the bills come due.

What are ways to change debt-enabling habits? Here are a few ideas.

• Focus on the budget: Being aware of what you can afford to spend and paying attention to the bottom line should make you pause before buying.
• Be disciplined: When you pause and ask if you can afford the item you’re buying, don’t do it if it does not fit the budget. Thinking, “Well I’ll figure it out later” only leads to adding more debt to the growing mountain.
• Cut up your credit cards: Take a drastic step. Cut your cards in half, then concentrate on paying down your debt. Replace the cards with new ones when you have done so.
• Talk to a nonprofit credit counselor: Nonprofit credit counselors are bound by law to give you the best financial advice. A consultation is free and can lead to solutions that could include a debt management plan.
• Stop unnecessary spending: A step that requires resolve and discipline.
• Cut back on nights out and restaurants: It falls under unnecessary spending and is another tough step, but it may be a necessary one.
• Take advantage of balance transfers: Sometimes a credit card company will offer new customers zero interest over a period of time if you transfer your balance to their card. You must qualify for this card, but it will help if you eliminate the debt in the introductory period of time. Always, always read the fine print to know the details of the offer. Not all offers are the right ones.
• Avoid the easy fix: One is a payday loan, which will only make your situation more difficult. An “easy” fix like that will only lead to longer-term problems.

7. Reduce Your Debt Load

There are several debt relief choices to help reduce the cost of existing expenses, including refinancing, consolidation and renegotiating payment terms.

Refinancing

Refinancing allows you to lower the monthly cost of debt. If you plan on staying in your home long enough to recoup transaction fees, refinancing your mortgage to a lower rate may be an excellent way to reduce your monthly obligation.

Refinancing a car or student loan to a lower rate is also an option.

Consolidation

Debt consolidation is a process that combines many debts into a single one, usually paid in monthly installments. Consumers can use a new loan or a debt-relief program like debt management to make the required payments.

The new payment should have a lower interest rate than existing loans and reduce the amount paid each month. Consolidation can lower out-of-pocket costs, shorten the payment period, and make payments more manageable. You must qualify and be able to cover basic living expenses and the consolidation payment.

If you have built equity in your house, a Debt Consolidation Home Equity Loan or Home Equity Line of Credit (HELOC) are options that allow you to replace credit card, auto loan or other high-interest debt with a lower interest rate loan.

Check the interest rate, though. Rates rose throughout 2022, and in November were between 6 and 7% for a home equity loan and up to 8.25% for HELOCs. This is likely lower than credit card interest, but must be studied to ensure you qualify and can afford the new loan.

If someone does consolidate loans through a home equity loan or line of credit, it’s important to realize that the new loan is now a secured debt. The house backs up the loan, so it is a less-risky venture for the lender.

However, it’s much riskier for the borrower. Failing to make payments could result in losing your home through foreclosure.

While consolidation may lower your monthly obligation, it’s vital to remember your total debt load has not changed, only the way you are paying it off. Continuing to use credit cards and taking on new debt could make your financial situation worse.

The best debt consolidation advice you can get is this: shop around, do your research and make an informed choice.

Renegotiating Interest Rates

Here’s something you may not know: Credit card companies sometimes are open to negotiating terms, if you have a large outstanding balance. Not always, but they are more flexible than consumers think.

Sometimes all it takes is a phone call to customer service to lower your credit card rate, whether it’s fixed or variable. When you call, tell the customer service agent your current interest rate and how long you have been a customer. If you have any pre-approved balance transfer offers from other banking institutions, explain them as well – it provides leverage, and maybe even an incentive for the card company.

The idea is the credit card company knows some consumers may default if they owe too much, so if a card company works with a consumer on the interest rate, the company at least will receive something.

One survey reported 56% of consumers who asked for a rate reduction got one, and the average savings was more than 30%.

Debt Snowball vs. Debt Avalanche Approach

Managing debt is like juggling: the more balls you have in the air, the harder it is to manage them.

Credit cards work the same way. If you have only one card and are trying to pay off the balance, it’s easy to focus. But if you have five cards that all have balances, it becomes trickier knowing how to proceed.

Keeping all the balls in the air – meaning you don’t go into default on any of your credit cards while you pay off what you owe – is best handled with a strategy. There are two schools of thought in the debt management world for how to do that.

The first strategy, known as the debt snowball method, requires that you list all your debts by size, disregarding interest rates, and pay off the one with the lowest balance first. The tactic requires that you continue making minimum monthly payments on all but the smallest debt, which you begin to tackle with whatever cash you have available.

One advantage to the snowball strategy is the short-term psychological reward. You can pay the smallest debt in the shortest amount of time, and it feels great to have checked a creditor off your list. Once the smallest is paid completely, move to the next smallest until you eventually are clear of debt.

The other strategy is called the debt avalanche method. In this model, you list all your card debt by interest rates and focus repayment on the one with the highest interest rate, regardless of how much you owe on each card.

Mathematically, this is the best approach because it saves on interest payments. However, it might not be as satisfying because it may take longer to pay off your first card.

It’s important in both cases to pay the minimum monthly balance on all cards while you pay down the one, you’re focused on. And as you pay off cards, don’t close them as that will have a negative impact on your credit score. Just put them in a safe place and don’t use them.

Pay Down Your Credit Cards

You may be eager to wipe your debt out quickly, but some bills are best paid off before others. It is recommended you take care of credit card debt prior to paying off car loans or a mortgage. Credit card interest rates are typically much higher, and mortgage interest is tax deductible.

Many financial analysts recommend consumers begin reducing their debt by paying more than the minimum payment on credit cards/loans with the highest interest rate. Once the high-interest debt is paid, you can tackle the next one more quickly by combining the regular payment along with the money previously paid on the first card.

For example: if you are paying $300 a month on credit card A and $200 per month on credit card B, once A is paid off, make $500 payments on credit card B. This is a positive and proactive step, and you’ll be surprised how quickly your debt will continue to dissolve.

Some financial analysts recommend paying off the credit card with the largest balance relative to your credit limit first as that will help improve your “utilization ratio.” This number indicates your borrowing power and accounts for 30% of your credit score.

While there are multiple theories, find the one that works best for you as they all eventually result in financial freedom.

While you’re paying down the debt, try to spend using only cash or checks (not credit cards). The advantages are clear: You can’t spend more cash than you have in your wallet, using checking accounts properly means no overdraws, and you’re not adding to your debt by using plastic.

Of course, you need to know how much money is in your checking account to avoid bounced check fees for overdrawing. Checking accounts aren’t credit accounts, so you need to only spend what you have.

» Learn More: Should I Empty My Savings To Pay off My Credit Card?

Moving Forward and Saving

Saving money while facing significant debt can be daunting, but it can be done with proper work and thought. It’s highly recommended that while you pay off your credit card debt you also make deposits to your savings account. Any deposit will help – be it $5 a week or $100 a month.

Building up the savings over time will eventually provide a nest egg to rely on in an emergency situation. It also means you will not have to rely on your credit cards as a bailout, giving you the debt-free living you desire.

Refinancing, consolidating and/or renegotiating terms can put you in a much better financial situation, but it’s important to remember to watch your daily spending habits.  Cutting back on expenses will help you in the long term. Adding to savings will help you even more.

With a little planning, downsizing your expenses and living within your means can be easier than you think.

Simply bringing your own lunch to work five days a week instead of eating out can possibly save $200 per month and thousands of dollars in one year. You can use that money toward paying off credit cards or even put it into a savings account.

There are so many little ways to save: buy in bulk and freeze foods to make a dent in the grocery bills, skip the automatic car wash, brew your own coffee, mow your own lawn, and get rid of your home phone.

When You Need Advice

Debt and how to best handle it can be a lot to consider, so it might be wise to consult with a nonprofit credit counselor from a certified agency. These counselors are bound by law to offer the best debt-relief option available.

Credit counselors are trained to help with budgeting and can provide options and solutions that include debt management plans.

These counselors also provide a solid solution to avoid loan scams and credit repair scams. A free initial consultation can be done over the phone, and by the time the call ends you should have a better understanding of your financial situation, and how to eliminate your debt.

A debt management plan reduces the interest rate on credit cards to somewhere around 8%. This should lower your monthly payment and allow to dig your way out of credit card debt in 3-5 years. Your credit score is not a factor for enrolling in this plan, but you must make on-time monthly payments to stay in the plan.

Talk to a nonprofit credit counselor and find the debt relief option that works best for you.