How to get out of debt: 5 steps to get started

Figuring out how to get out of debt can feel stressful, especially if you see debt start to affect your credit scores and financial goals. But devising a strategy and learning a few tactics could help you get where you want to be.

What you’ll learn:

• Tracking monthly expenses and building a budget can help you see how a debt repayment plan might fit into your financial situation.

• The debt snowball method and debt avalanche method are two strategies to pay off debt.

• The Consumer Financial Protection Bureau (CFPB) tells people to ask for help from creditors, counselors and others. 

• Before taking any action, reviewing the CFPB’s debt-repayment scams could help you identify risky loans and companies.

The CFPB recommends asking yourself three questions to help you plan a way to get out of debt:

• Where does my money come from? An hourly wage or annual salary may be only one of your sources of money. Consider other forms of income like tips, bonuses, income from self-employment, investment income, support from family, government benefits and child support.

• Where does my money go? Tracking your spending will help you see where your money is going. You could even consider sorting your spending into different categories.

• What bills do I have to pay, and when are they due? Keeping up with your bills and their due dates can be tough. Consider using a calendar to help you stay on top of things and plan ahead.

Tracking your income and spending in one place are the basics of budgeting. The CFPB recommends using your budget to review your finances one month at a time. Having a budget might help you analyze your spending habits and look for areas where you can cut unnecessary expenses to put toward paying debt instead.

Debt repayment strategies aren’t necessarily one size fits all. It helps to consider the types of debt, fees, interest and other potential costs. But the CFPB highlights a few methods to tackle debt:

With the debt avalanche method, you focus on paying off the balance with the highest interest rate as quickly as possible while continuing to make the minimum payments on any other debts. Then move to the balance with the next highest interest rate. In other words, you create an avalanche of payments as you pay off debts.

Progress may feel slow with the debt avalanche method because you won’t be paying off individual debts as quickly as you would with other methods. But it can save you money in the long run by prioritizing paying your most expensive debts.

With the snowball method, you focus any extra money on paying off your smallest balance as soon as possible while continuing to make the minimum payments on any other debts. Once you’ve paid that smallest balance in full, you can use the money you’ve freed up to pay off your next smallest balance and so on. 

Paying off your smaller balances first costs you more in the long run if you neglect larger balances or high-interest debts.

Debt consolidation could be part of plans to tackle debt with both the debt snowball and debt avalanche methods. Consolidating debt means combining multiple balances into one account. 

Using a balance transfer card or a debt consolidation loan could allow you to simplify your payments and find a lower annual percentage rate (APR) or interest rate. Some credit cards even offer limited-time promotional rates, such as 0% introductory APRs. But there might also be fees to consolidate debt.

If you’re unable to pay your bills, the CFPB and the Federal Trade Commission (FTC) say to seek help right away. In some cases, lenders may be willing to work with you if you’re transparent about your situation.

A credit counselor could be another option. According to the CFPB, these organizations could “advise you on your money and debts, help you with a budget, develop debt management plans, and offer money management workshops.” And if you’re looking for ways to get out of debt entirely, a qualified counselor may be able to advise you before you make any major decisions, such as filing for bankruptcy.

Having a mindset to get out of debt quickly makes total sense. But if you see offers or claims to do it quickly, it might be worth taking a second to do some research. The CFPB and FTC warn about the risks and downsides of things like:

• Short-term loans: Short-term high-cost loans like payday loans can come with high fees and interest rates. Payday loans are illegal in some states. If a loan requires you to put up collateral, defaulting could mean losing the asset that secures the loan. 

• Debt settlement companies: The CFPB says that debt settlement companies charge expensive fees and typically encourage customers to stop paying bills, which can result in late fees and penalties and hurt credit scores. “Debt settlement may well leave you deeper in debt than you were when you started,” the agency says.

• Debt relief scams: The FTC says to watch out for companies and individuals that make promises to eliminate all your debts or charge you up front without assessing your finances first.

Becoming debt free requires consistency and patience. But developing a plan that includes a budget and finding support could help you on the way. 

For more budgeting help, read about how to save money and still pay off debt. And if you’re considering debt consolidation, you can explore how a Capital One balance transfer credit card could be useful.