How to get out of debt: 8 strategies

It’s a common misconception that all debt is bad. Some forms of debt can help you improve your professional and personal life. For example: student loans, home mortgages and auto loans.

But while debt can be useful, overspending while already in debt can lead to a difficult situation.

To find tips for avoiding unnecessary debt and staying current on payments, we asked Bob G. Wood, a professor of finance, to share his top strategies. Wondering how to get out of debt? Here are his suggestions to help you work toward lasting financial freedom.

One of the first steps to getting out of debt is to stop adding to it. Credit cards can be a helpful payment option, especially for unplanned expenses. However, carrying a balance you can’t pay off each month can make it harder to reduce your debt. It can also increase your overall debt load and hurt your credit score.

“A debt-averse individual pays the total balance on each credit card before the payment due date to avoid interest charges and late fees,” Wood explains. “This approach helps people avoid using the cards to buy things they cannot afford.”

Struggling to pay off debt? You may want to put some investments on hold until you’re debt-free. In some cases, paying off your debt faster will save you more money than your investments can earn.

According to Wood, the exception to this rule is investing as part of your retirement savings plan, such as contributing to a 401(k). A 401(k) is an employer-sponsored retirement account that allows employees to save and invest money for retirement.

“I recommend continuing to fund retirement account investments, especially for those individuals with employer-provided accounts,” Wood says. “Also delaying retirement investment contributions can greatly reduce the future value of the account.”

While putting extra cash toward debt payments is helpful, having a steady plan is necessary to handle debt. Wood shared the following steps to take when you’re budgeting to pay off debt:

• Step 1. Differentiate between your needs and wants. “Be honest. Upgrading to the latest cell phone or adding clothes to a full closet are more than likely wants rather than needs,” Wood says.

• Step 2. Develop a realistic budget. Start by creating a realistic budget that helps you keep your spending in check. Your budget should include a fixed monthly amount dedicated to debt repayment. This should be in addition to any required monthly payments for student loans, auto loans or a mortgage.

When creating a plan to get out of debt, you may consider the popular “debt snowball method.” This method targets the smallest debt first. Once that balance is paid off, you focus on the next-lowest balance until all your debts are paid.

While seeing a debt of any size reduced to zero feels like a relief, this approach may come with a cost. “Unfortunately, the strategy often results in more interest paid by the borrower,” Wood says.

“As an alternative, the ‘debt avalanche method’ targets the highest interest debt first,” he explains. By doing this, “the borrower reduces the total amount of interest paid. Although this approach is more financially sound, it requires the borrower to focus on the long-term result and remain diligent in their payment plan.”

With either approach, it’s important to stay current on all debt payments. This means paying at least the minimum amount due while putting any extra money toward your targeted debt.

Another strategy is to renegotiate your terms with your lender. While there are no guarantees that a lender will agree to adjust your debt, you may have more success if you’re a long-term customer. A history of making on-time payments may also strengthen your chances of reaching a new agreement.

In this case, a lender may be willing to waive fees, shift due dates or even lower the interest rate. And these actions shouldn’t affect your credit rating, Wood notes.

Before committing to an arrangement, consider seeking guidance from a professional. They can help you evaluate your specific situation, needs and goals.

Transferring credit card debt to a new account has advantages. In fact, some transfer offers may have an introductory period with an interest rate of 0%. A balance transfer can also reduce multiple payments to one, with a single payment date.

Just remember to keep an eye on your calendar. That way you’re aware when the introductory period ends, and the new interest rate begins.

Wood explains that debt consolidation works in a similar way. These balances are typically rolled into a personal loan, home equity loan or credit card with a lower interest rate. When you combine multiple debts into one account, you could be reducing your monthly payment.

Borrowing money from a trusted family member can help you save a lot on interest, making it easier to get out of debt faster. Let’s say that loved ones lend you the money you need to pay off your high-interest debts in full. You can then focus on paying them back at a lower interest rate or with no interest at all.

Just ensure you and your loved ones are on the same page about the repayment agreement. This can help prevent misunderstandings and protect your relationships.

There may come a point when you need to hire a professional to help with debt planning. “An individual should seek debt counseling when the anxiety associated with the debt interferes with the person’s personal and professional life. Or, when the minimum debt payments are not possible without sacrificing necessities,” Wood says. “There are both for-profit firms and nonprofit counseling agencies available to help someone through the process.” 

For example, the Consumer Financial Protection Bureau offers advice and resources on how to select the right counselor. These resources can help you find a qualified professional who fits your needs.

Getting out of debt takes time, but having a plan can help you make steady progress. Keep these tips in mind as you work toward becoming debt-free:

• Choose a repayment strategy that works for you. Methods like the debt snowball or debt avalanche can help you stay motivated while paying down balances. 

• Create a realistic budget and stick to it. Track your spending and put extra money toward your debt to help pay it off faster. 

• Stay consistent with your goals. Making on-time payments and avoiding new debt can help you build momentum and improve your financial future.

There are many approaches you can use to get debt-free faster. Take some time to create a realistic plan to tackle your debt so you can pay it off for good and start making your money work for you.