Getting Out of Debt For Real This Time

Ugh. Debt. Debt is gross. It’s got a random silent “b.” What’s up with that? I don’t know.

Most people will incur some kind of debt in their lives. It’s almost inevitable if you intend on buying a car, owning a home or pursuing higher education. Debt can also be an unpleasant byproduct of life’s more tragic events, like health issues, job loss or even the death of a loved one.

With careful money management and an ounce of luck, debt can be manageable. But debt can also get out of hand, whether through sheer carelessness or pure misfortune. Either way, you have to pay it off. So if you have a large amount of debt that you can’t get out of the lazy way, here is how you get rid of it:

Pay off one source of debt at a time: Anyone who’s ever had debt before can tell you how elated you feel when you pay it off. So rather than trying to pay off multiple sources of debt little by little, focus on one source of debt at a time. Progressively dropping off your sources of debt, rather than just your amount of debt, will do wonders for your optimism and give you the momentum needed to pull yourself out of the red.

Take an inventory of all your debt. Find out how much your balance is on each and how much the interest rate is. Then focus on paying off either the account with the highest interest rate or the one you can zero out the fastest. Just make sure you keep making the minimum payments on all your other sources of debt so your credit score will remain intact.

Figure out how much you actually need to pay: Let’s say Sally goes a $1,000 shopping spree and puts it all on her credit card. She thinks to herself, “I can pay $100 a month and pay it all off in 10 months.” Poor Sally isn’t thinking about the interest rate, which is a fee creditors charge for borrowing money for an extended period of time. We will imagine Sally’s rate is a decent 13% (though let’s be real, if Sally’s the kind of gal amassing $1,000 debts in one day, her interest rates are probably much higher). Sally will need 11 months to pay off her few hours of retail therapy.

Now imagine if Sally were only paying the minimum monthly payment, which for many credit cards is the interest plus 1% of the card balance. She wouldn’t be debt free for almost 8.5 years! And that’s assuming she doesn’t incur any other debt in the meantime.

If you want to get out debt quickly, the minimum payment is usually not going to cut it. So bring out your pencils and start doing some calculations. JUST KIDDING! Who still buys pencils? There’s a handy calculator at that can help you determine how much you need to pay to be debt free by a certain time, as well as how long it will take you to pay off your debt given a certain monthly payment.

Pay yourself before you reward yourself: If you have debt, you probably know better than to splurge on a Eurotrip. But don’t forget about savings and retirement! There’s no point putting money in a savings account that only gains 1% each year when you are paying 15% interest on a credit card. Same goes for your automatic payments into your retirement account. It’s always good to have an emergency fund, but keep in mind that while you deal with debt, you might be bleeding out more than you save until the debt is gone.

Trim the fat from your spending: I’ve raved about before. It’s a great site for organizing your finances. One of my favorite features is that it categorizes your income and spending. You can even make your own categories. That way, it’s really easy for you to see where your money is going and where you can make practical cuts. Do you really need to spend $500/month eating out? Maybe you can cut that down to $300/month and only increase your grocery expenditures by $75/month. Even if you don’t sign up for an account with Mint, I highly suggest that you categorize your spending and find measurable ways to tighten your budget. Hard-set budgets are usually more effective than ambiguously “trying to save money.”

Consolidate if necessary: If “debt consolidation” sounds unwieldy, that’s because it kind of is.

One way to do it is through a debt consolidation loan. The lender pays off all your debt for you, and you pay the lender back, usually at a lower monthly payment. Be careful, though. A lower monthly payment usually comes with a higher interest rate. You’ll also be paying off your debt at a slower rate, so you will be in debt for longer and will most likely end up paying more over time. In general, this is better saved for when you truly can’t make your minimum payments, which leads to high late fees and a poor credit score.

A slightly better way to consolidate credit card debt is through a balance transfer. Last math problem for this article, I promise. Just stick with me here.

Sally has a credit card with $1,000 at a 13% interest rate. She gets an offer in the mail for a credit card with an introductory 0% interest rate for one year for all balance transfers. Balance transfers will be subject to a 3% fee. If Sally applies for the card and is accepted, she can move her $1,000 to this card. She will only be charged $30 for the transfer. If she continues paying $100/month, she will pay off the debt in 11 months and only pay $30 for the last month. If she had kept it on her old card, her total interest would have been $64. She saved $34 by doing the balance transfer.

The savings from a balance transfer will vary depending on your debt and your current credit card interest rate. You can use this calculator to find how much interest you’d pay on your current card (just switch the graph view to “Total Interest Paid”) and determine if this is the right path for you. Also, make sure your credit is in good enough standing that you will qualify for the benefits of that card. Remember – too many credit card applications can negatively affect your credit score.

Dealing with debt is dreadful, I know. But follow these tips, stay disciplined and be patient. You’ll emerge from your debt as a happier and wiser person with leeway in your budget and an arsenal of good financial habits.

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