How Can I Get Out of Debt?

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At least 69 percent of American households carry some kind of debt, according to the U.S. Census Bureau. That’s down from 75 percent 10 years ago, but those of us who do carry debt carry more than ever before. Consider these statistics from Census Bureau and NerdWallet reports:

  • Median household debt in the United States is now $70,000
  • Average credit card debt is more than $15,000
  • Average mortgage debt is nearly $150,000
  • Average student loan debt is more than $33,000
  • Nearly 1.2 million people filed for bankruptcy last year. More would file if they could afford the legal fees.

Causes of debt

If you’re carrying more debt than you can handle, you’re not alone. The causes of our financial distress are as varied as the people who carry the debt. But common threads emerge:

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Medical expenses. One of the most common ways Americans lose control of their finances is by experiencing a medical emergency, particularly while uninsured.

Student loans. Many borrowers take out education loans, but no school can guarantee a job upon graduation.

Credit cards. Credit cards are a little harder to get than they used to be, but their lure still traps many a financially inexperienced consumer. It’s not hard to spend a little more than you can afford to pay off at the end of the month… and then to watch the balance snowball.

Any debt level that feels too hard to pay back is too much. And even if you’re keeping up with your payments, you might be at risk of losing control. Research online debt calculators to see if your debt burden is too heavy.

4 steps to conquering your debt

If you’re in debt over your head or you are at risk of losing control, the steps to answering the question, “How can I get out of debt?” are very simple and straightforward.

1. Stop charging. You have to cut up your credit cards. Keep one, but put it someplace inaccessible. One trick is to freeze it in a Ziploc bag full of water. Create a delay between the time you want to use it and the time you are able to get your hands on it. Those extra few minutes could be all the time it takes to talk yourself out of using the card.

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2. Negotiate. Call each of your credit card issuers and request lower interest rates. You’ll have better luck if you’ve paid your bills on time. If they refuse, try again in a few months. Take advantage of zero percent interest rate offers that come to you and learn how to shift your balances around so as to pay the least amount of interest. You need time to pay down your balances while no additional interest accrues. You must be extremely diligent about managing your accounts and resisting the urge to make purchases with the new cards.

3.  Make a budget. Cut out as many expenses as you can.  Give yourself an allowance each week in cash and stop spending when it’s gone. Figure out how much you can afford to pay toward your debt each month after you pay for housing, food and other necessities.

4. Pay your bills. Take the amount you’ve budgeted for paying down debt and make the minimum payment on all but one credit card. On that card, pay the minimum plus the rest of the money in your debt payments budget. Most people start with the card that has the highest interest rate, but if you have an account with a very low balance go ahead and start with that one. Paying off an account is extremely gratifying and motivating. Every month, pay as much as you can possibly afford. When the first account is paid off, pay down the next account in the same manner. Always apply the money you were spending to pay down the previous accounts to paying down the subsequent accounts.

Financial rules of thumb

The old standards still apply to us all:

Avoid carrying balances on credit cards. If you want something you can’t afford, save for it. Use the card for things you can pay off this month, and nothing else.

Maintain six months’ worth of living expenses in an emergency fund that you don’t dip into. If you are in a higher income bracket, your emergency fund should be bigger.

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Research and consider buying health insurance. Catastrophic coverage (or “high deductible”) plans are available to many for low monthly premiums and limit your financial liability in case of an accident or illness that requires medical attention. As anyone with medical debt will tell you, it doesn’t take much to rack up tens of thousands of dollars in bills. But many of us can protect ourselves financially for just a few hundred to a couple of thousand dollars a year.

Don’t go it alone

If you think this all sounds much easier said than done, you’re right. Getting out of debt is not easy or quick. But in following these steps, you’re learning valuable financial management lessons that will last your lifetime. And you’re investing in your own future.

Get advice, help and support from a professional debt counselor. But don’t pay a service that offers to settle your debt for “pennies on the dollar” or any other terms that sound fantastic. If you’re in the military, visit www.militaryonesource.mil. If you’re not in the military, visit the National Foundation for Credit Counseling website (www.nfcc.org) to search for a free or low-cost counselor in your area. You can also check with your own creditors – many offer free credit counseling to struggling customers. Call your mortgage lender and visit the local branch of your bank to inquire.

Once your debt is paid, you’ll be much less likely to let it get out of control again. But it’s your job to be forever diligent, ensuring your own financial stability. After you pay off your creditors, pay yourself. Invest in your savings, your home and your retirement.

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