To get out of debt, you need a plan, and you need to execute that plan. But that can be easier said than done. It’s easy to become overwhelmed with the steps you need to take when you’re figuring out the best way to get out of debt. And it’s also easy to lose motivation if you don’t realize how much progress you’ve already made.
As you work on your plan, you’ll need to make all necessary adjustments to your budget along the way so you don’t overspend and slide back into debt. Plus, if you don’t have an emergency fund, consider setting some money aside in savings beforehand.
To help you get started — and then stay on track — we’ve created this simple, five-step, get-out-of-debt checklist. Keep it someplace where you’ll see it often, and make it your goal to check a task off the list each day (or each week), depending on how quickly you want to become debt-free.
What Is the Best Way to Get Out of Debt?
If you want to do this right, you want to make sure that you know where you stand before you start. You need to have a complete picture. Here’s what you need to do:
- Gather your most recent statements for all loans and credit cards.
- Get your free annual credit reports to check them for accuracy and to identify all debts.
- Get your free credit score at Credit.com to find out whether you’re eligible to lower your interest rates or for a debt consolidation loan.
- Check the National Student Data System to gather all student loan information.
1. Make A List
Having everything written out in front of you is really the key to success here. Plus, once you’ve written it all out, and it’s right there in black and white, it may not seem as insurmountable as it did before.
- Make a list of all your debts: name of creditor, interest rate, balance, minimum monthly payment.
- Also list how much you’ll need to pay in order to zero-out the cards’ debt within three years, as found on credit card statements.
- Remember to include loans not listed on your credit reports (e.g. family loans, medical bills).
2. Lower Your Rates
Paying high interest rates on existing debt causes your debt to really mount, and makes paying it off much more difficult. If possible, you want to lower those interest rates. Here’s what to do:
- Based on your credit, you may qualify for much better interest rates on credit cards.
- Open a free account with Credit.com and see what kind of low rate balance transfer credit cards you can get.
- Check out student loan consolidation and Income-based Repayment at StudentLoans.gov.
- Call your card issuers to ask for lower rates on credit card balances.
- Consider a consolidation loan and/or balance transfers to pay off high-rate credit cards at a lower rate.
- Find out if you can refinance a high-rate auto loan.
3. Get Your Number
Once you know what your total payoff number is, you’ll have a real, complete goal to work towards.
- Total the three-year pay-off amount for all your credit cards.
- Add the monthly payments for all other debts.
- Write down the result: Your Total Monthly Payment.
4. Plan Your Strategy
There are plenty of ways to attack this problem and you’ll likely approach this using a variety of tools and methods. Plan your strategy carefully.
- Determine if you can afford to pay the Total Monthly Payment until your debt is paid off.
- If not doable, contact a credit counseling agency and/or bankruptcy attorney for advice.
- If doable, decide which debt to pay off first (highest interest rate or lowest balance?) — “target debt.”
- Set up “auto pay” for required minimum for all debts except target debt.
- Pay as much as possible toward target debt until paid off.
- Choose new target debt and pay extra toward that one, and so on.
5. Monitor & Adjust
Once your plan is set, don’t get too comfortable. You’ll need to track your behavior closely to make sure you’re making progress, and you’ll want to make adjustments when necessary.
- Monitor your credit score each month to see if your credit score improves (over time it should).
- As your credit score improves, reconsider a consolidation loan or balance transfers to save money often spent on interest charges for remaining debts. (Your interest charges are often listed on yoru credit card statement.)
- Stick with your plan until your debt is paid off.