Ten Tips to Getting Out of Debt


For some, job layoffs and unforeseen external factors have loaded them up with debt. For most, however, debt is the result of extraneous spending, poor money management, or both.

Here are ten tips to getting out of debt. Some are easier to follow than others, but all are designed to help alleviate the problem:

1. Create a realistic monthly budget for your expenses. List all monthly bills and necessities and make sure they are covered by your monthly income. Allow only the money remaining after the bills are paid to be spent elsewhere. Stay within your budget guidelines.

2. Pay off the balance on the credit card with the highest interest rate first (unless the balance on any card exceed 50 percent of your credit limit). First, pay all balances to below 50 percent of the card limit because balances above this level cause your credit score to diminish. Then pay off the balance on the credit card with the highest interest rate. If the account was opened within the past year and you have additional older accounts, close it after it is paid off. Next month do the same with the card that has the next highest interest rates. Continue until you reach the credit card with the most favorable terms (i.e., low interest rates). Use this as your preferred account. You need only four open accounts to establish a positive credit history.

3. Learn to use cash instead of credit cards. Have one primary credit card and use it only for emergencies or major necessities, such as a new refrigerator if the current one stops working. Put your credit card in a safe place, not available for everyday use. Also, do not accept increases on your credit card limit above an amount you can easily pay off in three months.

4. Use direct deposit for your paychecks. Also have a limit on how much you will allow yourself to withdraw each week and month.

5. Cut down on your discretionary expenses. This includes dining out, overusing your cell phone, and other such unnecessary expenses.

6. Evaluate your living situation. Your housing costs should be no more than 33 percent of your household income, including mortgage payments, property tax, and both property and homeowner's insurance. You can shop around for lower insurance rates, refinance your home mortgage, and look for more economical utility plans.

7. Avoid borrowing money to get out of debt, especially consolidation loans. Many people think this is a way of helping them get out of debt. However, consolidation loans are simply a means of combining debt. You could end up losing everything because you’ve tied it all up in one loan. If you must borrow, see if a friend or family member can lend you money, since the interest rates should be low or nonexistent.

8. Contact your creditors and try to work out repayment plans. Many creditors are willing to work with you in a manner that will help them get their money without having to resort to debt collectors.

9. Become a savvy shopper. Look for deals, bargains, and savings. You’d be surprised at how much you can save if you take the time to shop around. Check out the price comparison Web sites such as Shopping.com and BizRate.com.

10. Look for extra ways to make some money. From part-time work to a garage sale to taking in a boarder, there are many ways to bring in some additional income.
If all else fails, seek out help from a debt reduction specialist or counselors who can help you formulate a plan for getting out of debt and staying out. Just make sure that you check out the service in advance. Many companies are simply taking advantage of people in debt and charging them high service charges.

Ten Tips to Getting Out of Debt
2. Pay off the balance on the credit card with the highest interest rate first (unless the balance on any card exceed 50 percent of your credit limit). First, pay all balances to below 50 percent of the card limit because balances above this level cause your credit score to diminish. Then pay off the balance on the credit card with the highest interest rate. If the account was opened within the past year and you have additional older accounts, close it after it is paid off. Next month do the same with the card that has the next highest interest rates. Continue until you reach the credit card with the most favorable terms (i.e., low interest rates). Use this as your preferred account. You need only four open accounts to establish a positive credit history.

Dave Ramsey advocates the Debt Snowball:



The basic steps in the debt snowball method are as follows:

List all debts in ascending order from smallest balance to largest.

This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.

Commit to pay the minimum payment on every debt.
Determine how much extra can be applied towards the smallest debt.
Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.

Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.

Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
Repeat until all debts are paid in full.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).
The theory works as much on human psychology as it does on financial principles; by paying the smaller debts first, the individual, couple, or family sees fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.

3. Learn to use cash instead of credit cards. Have one primary credit card and use it only for emergencies or major necessities, such as a new refrigerator if the current one stops working. Put your credit card in a safe place, not available for everyday use. Also, do not accept increases on your credit card limit above an amount you can easily pay off in three months.


Create a $1000 savings account rather than the credit card. That way should an emergency arise, you can use your savings versus going back or further into debt.

Good posts. A lot of people (and I've been there) really don't have a plan. They just kind of keep bailing every month and think they are being deprived and life sucks if they can't buy that magazine on the checkout stand. Life really is better when you get your debts under control or even eradicated. Being poor sucks. It really sucks. Do what you can to not be poor.

Dave Ramsey advocates the Debt Snowball:

The basic steps in the debt snowball method are as follows:

* List all debts in ascending order from smallest balance to largest.
o This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
* Commit to pay the minimum payment on every debt.
* Determine how much extra can be applied towards the smallest debt.
* Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
o Note that some lenders will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction.
* Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
* Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).
The theory works as much on human psychology as it does on financial principles; by paying the smaller debts first, the individual, couple, or family sees fewer bills as more individual debts are paid off, thus giving ongoing positive feedback on their progress towards eliminating their debt.

That's how I paid mine off. It works very well. In theory AND in practice.



Originally Posted by Karried
3. Learn to use cash instead of credit cards. Have one primary credit card and use it only for emergencies or major necessities, such as a new refrigerator if the current one stops working. Put your credit card in a safe place, not available for everyday use. Also, do not accept increases on your credit card limit above an amount you can easily pay off in three months.

Originally Posted by CuatrodeMayo
Create a $1000 savings account rather than the credit card. That way should an emergency arise, you can use your savings versus going back or further into debt.

You really should use a credit card for major purchases, but I agree with the $1000 savings account (is $1000 enough?). When I have a major purchase, I pay with a credit card, then pay the card off as soon as I get the bill - thus avoiding having to pay interest charges. Buying with a credit card provides the buyer with some consumer protections that paying cash does not.

Sorry, I should have specified I got these tips off of another website. They are not my personal tips.

One thing we've always done is to raise the deductible on our Insurance policies to reduce the rates.

Use that savings to have a reserve account for the deductible should anything happen and then the rest to pay down any credit card debt.

If you are having a problem paying down your debts, I would suggest calling and talking to someone... there are many places that can put you on a payment plan ie .. utilities.. and they don't charge interest.

So, if you are someone who got suckered into a department card and are paying 20% plus each month, you'll never get it paid off if you only pay the minimum...

I think paying off the highest interest rates first works best, but paying the snowball way will work too.

When I did use credit cards in the past, I always consolidated any debt onto one Zero percent teaser rate and paid everything I could towards that one remaining balance.

Of course, this was in the day where credit was easily had. We've always had great FICO scores so that always helps in getting a good rate. Now it's not so easy.. one late payment and the card companies go crazy raising the interest rates and hitting you with late charges.

I would never use credit cards given the choice. If you don't have the money to buy, then don't.

Excellent post.

The "universal default" rules (where if you miss one payment and they get jacked up across the board on all your cards) is outlawed as of July, 2010. There's a bill working its way through congress called the "Credit Card Accountability, Responsibility and Disclosure Act". It's expected to pass in both the House and Senate and President Obama says he will sign the bill. It will be even tougher with new consumer protections against credit card company abuse. It would end the universal default 90 days after passage, so one way or another that predatory rule will be gone, along with several other awful practices. Elections matter.

Karried,
You listed some very practical solutions for getting out of debt.

I'm so grateful for having a wife who knows how to work our money and
has tremendous administrative abilities. We are debt free and, although we
AREN'T rich, we live like kings and queens. By debt free I mean mean that
we own our house and the only bills we have are utilities and whatever is
on the credit card at the end of the month. The credit card also pays us
money.

We're OLD, too. That means we've been paying for EVERYTHING for a
million years.

Everybody can live practically debt free. All it takes (yeah right) is a frame
of mind that says, "we're going to live on what we make."

It's really that easy.

There is no real excuse to miss a CC payment. There are REASONS and I've done it plenty - but you enter into a contract and agree to pay. There are consequences if you don't pay when you agreed to. The incentive to keep your end of the bargain is something that this administration is attempting to undermine and it is NOT good for business. Knowing what to expect is what gives a society stability.

I don't take any satisfaction in the goverment "protecting" me from the big-bad credit card companies who penalize me when I screw up or blow them off. All that will do is make it more difficult for everyone to get credit and that is already a problem. Not paying on time is not something a predator has done - it is a screwup on the part of the cc holder. I don't need a mommy state to protect me from myself. If it is so painful to have to pay the price, perhaps I will start paying on time.

If I were loaning money, I darn sure wouldn't loan it to someone who thought I was a predator to expect them to pay me when they agreed. I once had a renter who insisted that she had two weeks to pay her rental payment. It was due the first and she would invariably pay it two weeks later and end up paying the late fee. She moaned and groaned every month and thought we were the devil incarnate. She insisted that it took two weeks for her check to clear the bank. Even after being hit with the late fee for months on end. It was ridiculous. All she had to do was pay on time and she'd have saved that late fee. I talked to her about this until I was blue in the face and explained that I needed her rental payment to make the mortgage payment or I would get hit with a late fee but she considered that "my" problem and still wanted me to make an exception for her. When she moved out, she'd done over twenty-five thousand dollars in damage from allowing dogs to run loose in the house. They chewed up everything, including the new deck, ruined the carpet, etc.

There is no real excuse to miss a CC payment. There are REASONS and I've done it plenty - but you enter into a contract and agree to pay. There are consequences if you don't pay when you agreed to. The incentive to keep your end of the bargain is something that this administration is attempting to undermine and it is NOT good for business. Knowing what to expect is what gives a society stability.

I don't take any satisfaction in the goverment "protecting" me from the big-bad credit card companies who penalize me when I screw up or blow them off. All that will do is make it more difficult for everyone to get credit and that is already a problem. Not paying on time is not something a predator has done - it is a screwup on the part of the cc holder. I don't need a mommy state to protect me from myself. If it is so painful to have to pay the price, perhaps I will start paying on time.

The predator part comes in when you're paying, for example, 6-8% on all of your 5 credit cards, but because ONE payment was late, all five cards jump to 29.99%. If that's not predatory I don't know the definition of the word.

Even Republicans support and are speaking out strongly in support of the elimination of "Universal Default" on a faster timetable than 07/2010. How can you possibly defend this with the argument that "Knowing what to expect is what gives a society stability?" That sounds an awful lot like Pinochet or Franco's military discipline. These banks are federally chartered, ECO. Who else is going to right them when they are clearly wrong? They are taking advantage of the people our elected officials are there to represent. This outrageous bank conduct being ended is an example of government working and it's really stretching it to think of this as a "mommy state" action.

It's called responsibility. If you conduct business in such a way that it brings the wrath of the public and government down upon you, it's nobody's fault but your own.

If you conduct business in such a way that it brings the wrath of the public and government down upon you, it's nobody's fault but your own.

I hope you are talking about the credit card companies and not the consumer.

Of course, everyone needs to be responsible and pay their bills on time and in a perfect world with no variables, sure, we all would love to be able to do just that... but things happen.. and when a tragedy strikes or a job loss occurs, credit card companies shouldn't have a free for all and tack on outrageous fees just because they can.

It's not about protecting the consumers as much as it is holding the credit card companies accountable.

I hope you are talking about the credit card companies and not the consumer.

Yes, I was talking about the credit card companies.

Good posts. A lot of people (and I've been there) really don't have a plan. They just kind of keep bailing every month and think they are being deprived and life sucks if they can't buy that magazine on the checkout stand. Life really is better when you get your debts under control or even eradicated. Being poor sucks. It really sucks. Do what you can to not be poor.

I wonder where everyone learns to behave in this manner. Oh wait, we see it on the news everday so it must be okay since our government has been and is continuing to do it!

For me, I personally have zero debt and am part of a company that grosses 4 million/year that also has no debt. It is possible!