Nobody wants to be in debt.
But, it’s very easy to find yourself in over your head if you’re not careful.
Don’t stress out about it!
Instead, work on developing a plan for how to pay off debt and manage your finances properly.
Not sure how to get started?
No worries, we’re going to explain to you how debt works, and give you the guide to paying off debt in 8 easy steps.
We’re going to cover:
- Revolving Debt vs Installment Debt
- What Happens If You Don’t Pay Off Debt?
- How To Pay Off Debt in 8 Easy Steps
Revolving Debt vs Installment Debt
The most common kind of debt that you deal with on a daily basis is revolving debt.
Whenever you use a credit card, you’re using revolving debt. You can use your card to make purchases up to your credit limit, you pay off your balances, and then you can continue charging- it all revolves.
If you don’t pay off your balance in full, you carry it over from that month into the next. When your balance is more than 30% of your total credit limit, you start to run into issues with your credit score.
In order to keep yourself in good standing, you should keep your credit card balances as low as possible. The recommendation is to have a credit utilization ratio of under 30%.
The other type of debt that you typically come across is installment debt.
Installment debt comes from:
- Personal loans
- Mortgage loans
- Auto loans
- Student loans
For these types of loans, you are required to make a monthly payment as part of your agreement.
Missing a payment on an installment loan won’t have a significant impact on your credit score due to the fact that these loans have such high balances to begin with, but it will be reported on your credit history.
Both revolving and the installment debt require that you make payments on time. When you miss a payment, it will be reported to the credit bureaus. Once you miss a payment, it will stay on your credit report for 7 years.
You’re not alone. US credit card debt is on the rise, with debts reaching a record high. (Source: US Debt Clock)
— Get Out of Debt (@getoutofdebtcom) March 6, 2019
What Happens If You Don’t Pay Off Debt?
If you don’t pay off your debts, there are definitely consequences. Depending on the type of debt and how late you are, there will be different repercussions.
There are many different types of debts, for example:
- Credit card debt
- Auto loan debt
- Personal loan debt
- Student loan debt
- Medical debt
When you don’t pay credit cards:
If you miss one or two payments it will result in:
- Late fees
- Loss of introductory APR
- Penalty APR
- Damage to credit score
If you miss three payments it will result in:
- Late fees
- Increased damage to credit score
- Closed credit card account
If you miss more than three payments it will result in:
- Late fee
- Substantial damage to credit score
- Debt sold to collection agency
So, even missing just one payment will have ramifications.
With an Auto loan:
- If you stop making payments, you will end up losing the car back to the lender who will relist it. If the car sells for the same amount of money you owe or more, you’re off the hook. But if the car sells for less, you’ll owe the lender the difference. The lender might set you up in a payment plan or they might just want to collect the entire balance.
With a Personal loan:
- As you begin to miss payment due dates, your lender will report these to the credit bureaus, and you can expect to see a drop in your credit score. If you continue not to pay, your loan will be sent to collections which will close a lot of doors for you for the next seven years.
With a Student loan:
- As soon as you go 90 days late on your account, it will be reported to the three major credit bureaus, hurting your score. If you hit 270 days past due, your loan will go into default. Because we’re talking about federal student loans, this means you’ll be entered into the wage garnishment process, where 15% of your paycheck will automatically go towards paying back your student loan.
With Medical debt:
- Going late on medical debt could have a huge impact on your credit score. But, medical bills are often looked as unexpected by lenders. Because of this, having medical debt won’t be such a huge factor when you’re interested in purchasing a car, house, etc. But, they will be entered into a collection process where you will be harassed for payments.
How To Pay Off Debt in 8 Easy Steps
Here’s the 8 steps you should follow in order to pay off your debt efficiently.
Step 1: Think about the “WHY”
Think about the reason or reasons why you want to get out of debt now.
Do you have something you’re saving for? Having a goal in mind will help you buckle down and pay down your debts quicker.
The money you’re spending on interest payments could be put towards:
- Mortgage down payment
- Auto down payment
- College funds
So start thinking about what it is that motivates you to get out of debt. There are a million different reasons out there, but there are some that are pretty common.
Do you want:
- less stress
- lower bills
- to feel free of guilt when you purchase something
- your credit score to increase
- to save for your future
- pay for your child’s education
- …to just enjoy life?
Make sure that when you make the decision to tackle your debt, you have a heck of a good reason behind why you want to do it. This is what will keep you motivated throughout the process.
Grab a sticky note and write your reason down.
Put that sticky note on your bathroom mirror.
Now, you’ll constantly be reminded of why this is important to accomplish.
Step 2: Know what you owe
This step might sound pretty basic.
But, the reality is that a lot of people are just too scared to face reality. They don’t want to know what they owe, and they’ve been avoiding looking at their credit card statements.
If you’re one of those people, it’s time to make a change.
Let’s develop better financial habits starting today!
Grab a piece of paper and a pen and begin writing down all of your debts. Make sure that you include everything. Think about everything you pay on a weekly, monthly, and yearly basis, and check your accounts for accuracy.
What information should you be writing down?
- Account Name
- The amount you owe
- Due date for each payment
- Minimum monthly payment
- Interest rate
Once you have this, it will be easy to determine which debt has the greatest priority. Try to organize your debts in the order you intend to pay them off.
Step 3: Create a budget
Creating a budget is one of the most important steps to pay off debt fast. When you put a budget in place, you are essentially telling your money where to go. You’re making sure every dollar has a job or purpose.
A budget is nothing more than your income versus your expenses. So you just need to know where to tweak it in order to make it work for you. You don’t have to live on a tight budget, there are ways to make it work.
If you’ve never done a budget before, you should make sure to read about it first. There’s a couple of different methods out there, and it takes a bit of effort to pick a strategy that works for you.
Budgeting can be easy, you just need to give it a try!
Creating a budget will help you determine how much money you have to put towards paying off debt.
Both Mint and YNAB were designed to help you create a #budget and analyze your #spending patterns so you can make the modifications necessary to reach your #FinancialGoals.https://t.co/rw7DGBQ6UZ#ThursdayThoughts #financialservices pic.twitter.com/IcpIJOIcek
— Get Out of Debt (@getoutofdebtcom) February 28, 2019
Step 4: Find a payoff strategy
There are many strategies to choose from. You need to try and find the one that best fits your current need at the moment.
It’s important to consider all of your options before making a decision.
- If you select this method, you will be paying down your debs from smallest debt first, to the largest. The way it works is that you pay the minimum payment on all your debts except the smallest one. On the debt with the smallest balance, you’re going to pay the minimum plus the additional money you freed up from creating a budget. Once you pay off your first debt, you will do the same with the next smallest account. You’ll continue doing this until you’ve paid all of your balances off in full.
The Debt Avalanche Method
- If you select this method, you will be paying the debt with the highest interest rate off first. An advantage to this strategy is that you’ll save the most money in the long run. How it works is that you’ll tackle your debt with the highest interest rate first, not allowing interest time to accrue. Once the first card is paid off, move onto the one with the second highest interest rate and so on.
- This strategy involves taking your various debts and combining them into one. When you consolidate debt, you’ll get a lower interest rate and even better, only one monthly payment to keep track of. Personal loans and balance transfers are two different ways you can consolidate multiple debts into one.
- You’re going to save money on interest with a personal loan as compared to a credit card. Plus, you’ll have a fixed payment and term and you’ll know when your loan will be paid off in full, and exactly how much you’ll be paying for it.
- This strategy involves moving an existing balance on a high interest credit card to different card with no interest. This will help you to avoid your balance from increasing as you pay down your debts. But be aware that these no interest periods don’t last forever. So, you need to be committed to paying your debt down before going down this road.
- If it seems like you’re in a little too deep to comfortably recover with one of these other strategies, debt settlement might be the right choice for you. This strategy will get out of debt while paying the least amount of money. It works through making negotiations with your creditors on each specific account.
At this point you have:
- Your why! The reason you want to get out of debt and pay it off
- You know how much you owe and who you owe
- You’ve created a budget based on your current situation
- You have a strategy on how to pay off debt
Step 5: Put plan of action in place
It’s time to get the ball rolling!
The more you think about it and don’t take action, the longer you’ll be stuck in debt. So make the moves you need to today, not tomorrow.
If you’ve decided to use the Debt Snowball or Debt Avalanche Methods, you should be good to go!
If you’ve decided to look into any of the other options, you should shop around and explore your options. Don’t just settle for the first lender you meet with, and make sure you’re comfortable with the agreement you’re making.
If you’ve selected Debt Settlement, you have two options:
- Do it yourself which is not recommended with no prior experience
- Hire a debt settlement company that can help you become debt free.
Step 6: Track your progress
In order to be successful at paying off your debt, you need to know if you are staying on budget or not.
But being real here, we both know that sometimes this is difficult to track with everything we have going on. We do our best to stay on a budget, but we don’t always have the time to evaluate how closely we’re sticking to the plan.
So this is where I am going to suggest that you consider one or both of these options:
- The use of a budgeting tool
- The use of a credit monitoring tool
Budget tools are there to help you stay organized and remind you of when your payments are due.
Credit monitoring tools are out there to keep you informed of your credit score and also alert you if any changes take place.
Some budgeting tools even offer credit monitoring services as well, so you can kill two birds with one stone.
With budgeting & credit monitoring tools in place, you’ll be able to sit back and monitor your progress with ease.
The average American is #spending far more on the weekends than they are throughout the week.
However, if your financial goal is to get out of debt, your weekend binge spending is probably hindering those goals. Help curb your #weekend spending. 💪 https://t.co/UGu69fUwqs pic.twitter.com/2a7iAbIQj9
— Get Out of Debt (@getoutofdebtcom) February 22, 2019
Step 7: Celebrate every WIN
Once you go through the process and start working through paying off your debts, take some time to celebrate a little.
Once you payoff a debt, reward yourself!
You committed to it and were able to accomplish your goal. So go out for a nice meal, or have a movie night with your family! You deserve it 🙂
Sometimes the process can become overwhelming. Maybe you’re not paying your balances down as fast as you thought you would, or you missed a payment because of an unexpected expense.
Don’t forget that you’re not alone, and so many Americans are in the same position you are right now.
If you start to feel overwhelmed, go back to step one and remember your why. What’s the reason you started this in the first place?
Go back to your sticky note and re-read it. Imagine how great it will feel when you pay off your last debt.
Step 8: Revisit your budget and make the proper adjustments
Make sure to revisit your budget, and make any adjustments as they are needed.
If you paid off a debt, be sure to allocate that money somewhere else.
A budget is something that needs constant attention. You need to continue making changes and adjusting it to your current situation.
Things can change daily, so be sure you’re constantly revisiting your budget. The last thing you want to do is wait until you’re back in debt!
Getting out of debt is never easy, but it can be manageable if you follow our easy 8 step plan.
It all starts with identifying the reason why you want to get out of debt. From there, you’ll work to develop a plan that fits into your budget and lifestyle.
With your ‘why’ in mind, you’ll be more motivated to stick your plan and become debt free.
What’s your reason ‘why’? Let us know in the comments!