Get Out of Debt

Assessing Your Debt

The first step toward decreasing your debt is to ascertain exactly how much you owe, but it’s not as simple as adding up bills and balances. You should also take into account the interest rates on different credit cards and the cost of payment penalties, such as late fees, cash advances, etc. For example, a $1,000 credit card balance at a 15 percent interest rate is far worse than a $1,500 balance at 9 percent. Furthermore, higher interest rates are typically applied to cash advances, and so they will accrue additional debt faster.

To properly assess your unsecured debt, first make a list of every charge card you have – department store cards, gas cards, and all major credit cards. Don't forget hospital bills either. On the list, note what the corresponding interest rates are and the current balances due.

Next, add in your regular bills: mortgage payments or rent, car loans, utilities, and so on. These bills must be paid first, before you can apply extra funds to outstanding balances. Be sure to include realistic estimates of grocery bills and other necessary spending, such as school supplies, medication, and emergency funds. Don’t forget infrequent charges such as car insurance or annual renewals on different policies.

Finally, subtract all your necessary bills from what you earn each month. The number that remains (before you’ve paid anything on unsecured debt) is the amount you have to start with when you begin to get out of debt.

Get Out of Debt: Steps to Take

Once you have a firm understanding of where your money needs to go for different bills, you can begin to take steps to reduce your debt. To help improve your credit history, pay at least the minimum on each credit card every month. This will help repair your credit even as you are still in debt. Concentrate your remaining extra funds on the cards with the highest balances first – by paying them off quickly, you save a significant amount of money by not accruing interest so rapidly. Many credit cards offer low interest rates on balance transfers: this may be a step you can take if you can pay off the transferred balance within the promotional period (generally 3-12 months depending on the card).

As you pay off different credit cards, call the card companies and close down your accounts permanently. Of course, you will want to keep one or two major cards available, but smaller cards (department store cards in particular) can easily be closed down to eliminate the temptation to begin spending again. Keep at least one card for emergencies, but put it in a location that you will not be tempted to easily use it. You could store it in a home safe, a safe deposit box, or even frozen in a bowl of ice – as long as it is not easy to grab, you will be able to resist adding on to your existing debt.

Finding the Extra Money to Pay Off Debt

For many people, finding the extra funds to get out of debt can be a challenge, but they often have more money available than they realize. Try eliminating little things: rent fewer movies, skip the morning latte, stop buying weekly lottery tickets, cook more meals at home, and try tasting generic groceries. Do you have magazine subscriptions? Reading periodicals at the library or chain bookstore is free. Do you really watch all seven of the movie channels on cable? Reduce your level of service. Other money-savers include:

• Raising the deductible on your insurance policies
• Take leftovers for lunch instead of eating out
• Walk around the neighborhood instead of using the treadmill at the gym
• Turn off lights and use lower wattage bulbs to decrease some utilities
• Avoid using the dishwasher or washing half loads of laundry
• Stock up on non-perishable items (school supplies, canned goods, shampoo) during sales

By making simple changes to your daily habits, you can free up extra dollars every month to apply toward paying down your credit cards. If you need more drastic steps, consider a home equity loan to consolidate your credit card payments into one lump sum, or consider taking on additional work to earn extra money (overtime hours or a part-time job). You may also want to investigate more drastic measures like debt consolidation programs or seek professional consumer credit counseling advice.

After You Get Out of Debt: Staying Clear

After you’ve finally rid yourself of debt, the hardest part may be not falling into old spending habits. By getting rid of your unused credit cards, you can eliminate many temptations but be sure to continue using the good spending habits you’ve acquired. Pay off credit card balances completely each month, and put off large purchases until you can afford to pay cash. Continue tracking every penny you spend so that you notice immediately when your bad habits begin affect your financial picture, and you can keep yourself debt-free.