Do you feel like you’re in a never-ending spiral of debt? Are you struggling to make payments every month? You’re not alone. Millions of people are in the same situation and are looking for ways to get out of debt.
Credit card debt, student loans, and mortgages are the most common debts Americans have. According to a recent study by CNBC, credit card debt is the most common type of debt among Americans. The average credit card holder owes $16,140 in credit card debt to credit card companies. Student loan debt are the second most common type of debt among Americans. The average student loan borrower owes $37,172 in student loans. Mortgages are the third most common type of debt among Americans. The average mortgage borrower owes $169,334 in mortgage debt.
While credit card debt, student loan debt, and mortgages are the most common types of unsecured debt Americans have, there are other types of debts that some Americans have as well. These include auto loans, medical debt, and personal loans.
In this blog post, we will discuss six easy steps that can help you get out of debt. We’ll also talk about the snowball method, the avalanche method, and debt consolidation. Follow these tips and you’ll be on your way to financial freedom!
What Is Debt?
Debt is when you owe money to someone. It can be in the form of a loan, credit card, medical bills, IRS or government debt, or even your mortgage. If you don’t have the money to pay back what you owe, it can get out of control quickly and become very difficult to get rid of.
As of 2020, the average American consumer had $4 trillion in debt. This means that many of us are likely struggling with some form of debt.
Many people in the United States struggle with managing and paying down their debt. While it may be tempting to look for outside help, there are ways you can begin to control your debt yourself. The first step is understanding exactly how much debt you have.
How Debt Can Negatively Impact Your Life
Debt can make it harder to qualify for other loans. Your debt-to-income (DTI) ratio, which is the amount of debt you have compared to your income, is one factor that lenders look at when considering approval of a personal loan. Most lenders want your DTI to be 43 percent or less.
The DTI ratio is a number that lenders use to determine how much of a monthly mortgage payment you can afford. To calculate your DTI, simply add up all of your current monthly debt payments and divide them by your gross monthly income. For example, if you have a $300 student loan payment, a $500 auto loan payment, and a $200 minimum credit card payment, and your gross monthly salary is $3,750, your DTI would be 26.67%. This means that the maximum mortgage payment you would qualify for is $612.50.
Debt can be a serious burden, especially if your DTI is already high. If you’re struggling to make ends meet, a mortgage payment can seem impossible. It’s important to remember that too much debt can make it difficult to save for other goals, like retirement or your child’s education.
If you are looking to work in law enforcement, financial services, or the military, you may be subject to a credit check when applying for a job. This is because people in these professions are more likely to be susceptible to bribery if they have financial difficulties. As a result, employers want to avoid hiring anyone who may pose a risk to their organization.
How To Organize All Of Your Debts And Bills
If you’re like most Americans, you have multiple lines of credit and various types of debt. It can be difficult to keep track of all your payments, but it’s important to stay on top of your finances. Luckily, there are some simple ways to stay organized and make sure you’re always meeting your obligations.
Here’s how to track down and tally up so you can get out of debt faster:
1. Tally up your debt
To get started, take a look at each of your accounts and jot down how much debt you have in total. You may need to do some digging to find the current loan amounts for all of your debts, but it will be helpful to see everything in front of you at once. This way, you can figure out which debt is the highest, how to consolidate multiple debts and prioritize the most urgent ones. As you’re going through your accounts, make a note of the type of debt for each one: personal loan, credit card, auto loan, etc.
2. Calculate your debt-to-income ratio (DTI)
Now that you know your monthly income and expenses, you can calculate your debt-to-income (DTI) ratio. Your DTI compares your total monthly debts to your monthly income. Lenders use your DTI to decide whether you qualify for loans or services.
Generally speaking, a DTI ratio of 35% or less is manageable. Between 36% and 49% means there’s room for improvement, and 50% or more requires immediate action to resolve.
How to calculate your DTI:
- To calculate your monthly expenses, start by adding up your debt payments, including credit card balances, student or auto loans, rent, alimony or child support, and medical debt. Then, you can include household expenses like utilities and groceries, if you wish.
- After you have tallied your monthly expenses, divide this number by your gross monthly income. Gross monthly income is the amount of your paycheck before taxes come out.
- The resulting number is your DTI percentage.
3. Check for debt in collections
If you are concerned about your debt levels, it is a good idea to check if you have any accounts in collection. This can be done by checking your credit report. Many companies offer a free credit score, but your bank or credit card company may also provide this service. Additionally, you are entitled to a free credit report each year from each of the credit reporting bureaus.
4. Be aware of your bad credit behavior
Once you have an idea of your debt and your debt-to-income ratio, it’s time to take a look at the habits that put your credit score in danger.
If you’re always broke, it might be because you’re spending more money than you make, or constantly trying to buy new and expensive gadgets. This can keep you stuck in a cycle of debt.
Debt can be a huge weight on your shoulders, both emotionally and financially. If you’re in debt, it’s important to take a hard look at your habits and see where you can make changes. However, the most important thing is to create a plan that will help you pay off your debt as quickly and efficiently as possible.
Now that we’ve gone over how to calculate your debt, here are 6 ways to get out of debt!
6 Easy Steps To Get Out Of Debt
If you’re struggling to make ends meet, it might be time to try a different debt repayment plan. By changing the way you repay your debts, you can speed up the process and get back on track financially. Debt consolidation is one of the most popular methods used by residents of highly populated states like California. However, each method has its own pros and cons, so you’ll need to carefully consider which one is right for you.
1. Debt snowball method
The debt snowball method, developed by personal finance expert Dave Ramsey, is a simple and effective way to get out of debt. The idea is to start with the smallest debt first and then work your way up to the larger ones.
The goal is to first pay off your lowest balance. That way, once you pay off one line of credit in full, you’ll feel a sense of accomplishment. This can help encourage you to keep going as you pay off the next item on your list.
The debt snowball method is a system where you pay off your debts in order of smallest to largest balance. Once the smallest debt is paid off, you roll that payment onto the next lowest balance. This continues until all debts are paid off.
Many finance experts swear by a method that, although it may not work for everyone, can be very effective. This method involves recognizing the psychological ploy for what it is and using it to your advantage.
2. Debt avalanche method
The debt avalanche method is a different way to get out of debt. Instead of the debt snowball method, which advises you to pay the minimum payment on every account balance simultaneously, the debt avalanche method suggests that you pay the minimum payment on every account balance and then apply any remaining debt repayment funds to the highest interest debt.
The debt reduction strategy known as “debt stacking” can be a helpful way to get out of debt. By making the minimum payment on all of your debts, you can slowly reduce the amount of debt you owe.
“Assuming you have extra money, it makes sense to focus on paying off the debt with the highest interest rate first. This will save you money in the long run and help you get rid of your debt more quickly,” stated Monica Spear, a specialist in debt consolidation.
The avalanche method of debt repayment has the benefit of reducing the balances on all accounts simultaneously, which can be satisfying for consumers who want to see a lower balance across the board. This method may work well for people who prefer gradual change on all accounts rather than focusing on paying off one account at a time.
3. Balance transfer credit cards
There are a lot of different ways to get out of debt, and one popular method is to use a balance transfer credit card. This type of card usually has a low- or 0% introductory APR, which can save you money on interest payments. If you’re struggling with high credit card interest rates or overall credit card debt, a balance transfer credit card could be a good option for you.
The introductory period for balance transfer cards is usually quite short, after which the APR reverts to a much higher rate. If you have a large amount of debt and no way to pay it off within the intro period, this may not be the best option for you.
If you are struggling to keep up with multiple credit card bills each month, you may be able to save money by consolidating your debt onto one of the best balance transfer cards.
4. Debt consolidation
Another way to get out of debt is debt consolidation. Debt consolidation loans are a great way to save money and simplify your monthly budget. By consolidating all of your debts into one debt consolidation loan, you can reduce your interest payments and save money each month. This is perfect for those who have multiple debts from different sources, such as credit cards, student loans, and medical bills.
If you’re looking to save money on debt repayment, a debt consolidation loan could be a helpful option. However, it’s important to examine the loan terms carefully before making a decision. Some consolidation programs may come with higher fees than if you were to continue making minimum payments on multiple debts. But the best consolidation companies will help you get out of debt while incurring minimal fees.
Debt consolidation can be a great way to save money in the long run and get out of debt, depending on your interest rates and debt consolidation loan terms. If you have high-interest rates, consolidating your debt can help you save money by lowering your monthly payments.
5. Debt settlement or debt relief
Debt settlement companies work on your behalf to negotiate with creditors and secure a reduction in your overall debt and other debt-relief services. By working with debt settlement services, you can get relief from your debts without having to file for bankruptcy.
There are a few things to consider before you decide on a debt settlement program. First, while this strategy can work well for consumers who are facing more severe credit problems, it can also negatively affect your credit score. Second, you’ll need to make a payment to the debt settlement company in order to absolve your debt.
Debt relief options can be helpful for people who are considering bankruptcy because it can help improve their credit score and get them out of unsecured debt. Although late payments on the settlement amount can negatively impact credit, making payments on time and eventually paying off the debt can help begin to improve credit scores.
6. Credit counseling and debt management
There are many ways to get help managing your debt. You can find finance experts who offer services and courses to help you budget and get out of debt with financial assistance. According to the Federal Trade Commission, there are also reputable credit counseling agencies that are non-profit and provide services both online and in local communities.
Credit counseling can help you get your finances back on track and get out of debt. A credit counselor can work with you to create a budget, manage your debt, and improve your financial habits. To find a credit counselor in your area, start with a quick internet search. Look for an organization that offers a variety of services, including budget counseling, debt management, and savings classes.
There are a few things to keep in mind if you’re considering visiting a credit counseling agency to get financial assistance. Although some of these organizations are nonprofit, they may still charge fees beyond your debt payments. If you enroll in a debt management program through one of these organizations, they may negotiate and pay off debts on your behalf; however, this service usually comes with a fee. Additionally, it’s important to ask plenty of questions before agreeing to the terms of a debt management plan recommended by a credit counselor.
The Bottom Line
If you’re looking to get out of debt, it’s important to know how much you can realistically afford to pay each month. There are online calculators that can help you protect your long-term spending and savings. And of course, avoid adding to your debt when possible.
Paying down debt is a process that takes time and patience. Making small goals and tracking your progress can help keep you motivated throughout the journey. Having an extra income to put towards payments can help speed up the process, but ultimately it comes down to making smart financial choices and sticking to your plan.
The key to getting out of debt, no matter the amount, is staying motivated. Plan a reward for when the debt reaches zero, and maintain a positive attitude. Before you know it, you’ll have made more progress than you ever thought possible. You’ll be well on your way to being debt-free.