Your Ultimate Guide to Paying Off Debt

how to pay off debt

Debt can hang over your head like a toxic cloud. Even if you haven’t done the actual math, somewhere in the back of your mind, you’re aware that things are quickly adding up.

Whatever is making your debts feel scary, out of control, or even unfair, it’s time to address it. And it all starts with learning how to pay off debt.

So get ready to spend a lot of mental, emotional and financial capital to resolve your debts by going through the following steps.

How to pay off debt in 15 steps

1. Admit your debts are an issue

Figuring out how to pay off debt often starts with admitting there’s a problem.

Sometimes you’re not even aware of how big the problem is. You just have a nagging sense that something’s not quite right with your finances. That’s why it’s important to pay attention to financial red flags and when you’re potentially getting too deep into debt.

For me, everything came to a head in 2012. At this point, I’d been stressed out about my family’s finances for a while. But when I stared at my Mint account and saw that the bank accounts my husband and I held only had $1,450 combined, I officially freaked out.

This amount was barely enough to cover our next month’s rent for our one-bedroom, Los Angeles apartment. And I knew we owed several times more than that on credit cards alone.

Meanwhile, I was unemployed. So that meant we were trying to scrape by on my husband’s $45,000 salary in this expensive city.

Thinking about my finances made me want to collapse in on myself and stop existing. But I needed to start seeing, in black and white, that I had a problem — and it was my debts.

2. Find out how much you owe

Before you can start digging your way out, you need to know just how deep in the hole you are.

Take inventory of your debts — the total balance, interest rates, and minimum monthly payments. For the debts you’re aware of and have account information for, you can get your debt details in a few ways:

  • Log into your lender’s online account management system.
  • Find your most recent account statements.
  • Contact your lender by phone.

If you think you might have debts you’ve lost track of, work to find them. Pull your free annual credit reports, then check for debts and accounts you might have missed. For student loans, you can use the National Student Loan Data System to find any educational debts that have fallen off your radar.

When I realized that my debt had become an issue, I took a full inventory. Here’s what I found:

  • There were our student loans — $26,000 from my husband’s graduate degree and $9,000 remaining on my undergraduate debt.
  • We owed $8,500 on our car.
  • Credit card debts of $1,700 and $4,000 from miscellaneous college expenses and moving costs.

In total, we owed $49,200. It was terrifying.

3. Commit to getting out of debt

Just thinking about how much I owed stirs up old financial panic and anxiety. I felt like a total failure for getting into debt. At the same time, I also felt powerless.

Truthfully, I wasn’t sure how I could have covered important expenses without debt. I told myself debt had been my only option. And after a couple of months of unemployment, I was feeling worthless and at my wit’s end with the job search.

But even as I was feeling scared and panicked, I decided to harness these big emotions into a powerful driving force for change.

You can do the same to get ready to make big changes in your behaviors and situation. Remember, it’s the combination of your choices and circumstances that got you into debt. And you’re going to need to do a complete 180 on those factors to figure out how to pay off debt.

Look, getting out of debt doesn’t happen overnight. Even if you’re intensely focused on this goal, this is not an issue you’ll be able to immediately resolve. It’s a marathon, not a sprint. You’ll need to be mentally tough and capable of dealing with debt payoff for months – likely years – to come.

4. Reduce what you owe

For certain types of debt, it’s possible to lower the initial amount you owe.

If you have medical debts, you can try to negotiate your medical bill and ask if any of it can be forgiven. And if you owe money to a doctor or hospital, ask about financial assistance programs. You can offer to pay cash for a portion of the bill and have the remaining balance forgiven. If that fails, try to set up a payment plan that fits your needs.

You can also try to negotiate any debts in collections. Again, you can offer to pay a portion of your debt in cash to have the remaining balance forgiven. Not every negotiation will be successful, but it’s worth a shot.

5. Try to lower interest rates

If you can lower interest rates, you’ll make your debts cheaper.

That’s because more of the money you put towards them will go toward the principal you owe. You’ll pay down debts faster and save money in the process.

There are a few ways you can try to lower your interest rates, and the options vary depending on the types of debts you have.

Refinance or consolidate debts. 

When you refinance or consolidate debts, you take out a new loan and use it to pay off other debts. This replaces existing debt with a new loan that has a lower interest rate and can simplify your debts.

You can do this with most kinds of debt, including refinancing student loans, credit card debt, a mortgage, or a car loan.

Credit card balance transfer.

If you have a credit card debt on a high-interest card, you can transfer this balance to a card with a lower APR to save on interest.

This can be especially effective if you get a new credit card with a 0% introductory APR. You can transfer the balance and get several months to pay it down, interest-free.

Negotiate interest rates.

Finally, you can call your credit card company and ask for a lower credit card rate. In many cases, your issuer will lower your APR indefinitely.

And if you can’t negotiate that, then ask for a temporary drop in your interest rate while you work to pay down the balance. Typically, only rates for revolving credit like a credit card are negotiable. Rates on installment loans usually can’t be lowered without refinancing.

6. Identify which debts are most urgent

When you add up your debts, it can be nauseating to realize how much you’ve accumulated. But it’s also important to realize that not every single debt is an emergency.

Therefore, don’t put pressure on yourself to solve the issue overnight. It will take a lot of hard work and time to pay off your debts. Here’s are the debts that are more urgent than others when it comes to paying them off.

High-interest debts.

If you have high-interest debts, these are the ones you need to worry about. Identify which debts are costing you the most and treat those like an emergency.

For instance, I knew I wasn’t going to figure out how to pay off debt that was a staggering $49,200 right away — especially not on $45,000 a year in a high-cost city.

But of those debts, only my credit card balances had interest rates over 6% APR. And these were costing me almost $100 a month in interest, which I definitely couldn’t afford. So paying off this credit card debt became priority No. 1.

Overdue debts or debts in collections.  

Other urgent debts will be accounts for which you are overdue, delinquent, defaulted, or in debt collection. These take priority because you want to:

  • Stop accruing more costs like late fees, collection fees, or penalty APRs.
  • Prevent serious consequences like wage garnishment or bank liens.
  • Avoid further damage to your credit and begin repairing it.

For low-interest debts, it’s ok to just pay the minimums for now. And if there are other debts you’re not legally obligated to pay, then don’t.

For example, if it’s an informal loan from a family member or friend, talk to them and see if you can put repayment on hold. If the debts are in someone else’s name, stop contributing to it.

Even if you feel responsible for the debt, you have no legal obligation to pay. Maybe you can pick up payments on these debts at some point, but for now, you can’t afford them.

7. Target your most urgent debt first

One of the most popular and effective strategies to repay debts is through the debt snowball method. It breaks down how to pay off debt into four steps:

  • Focus on paying down one balance at a time — starting with the lowest balance.
  • Make extra monthly payments on this debt until it’s gone.
  • When that debt is gone, you keep paying the same amount toward the next debt. So, if you pay $200 extra a month toward a credit card with a $50 minimum, once that debt is gone you’d start paying $250 extra toward your next debt.
  • Continue paying off debts until you’re debt free!

Since you know which debt is the most urgent, make efforts to pay it down. Whatever you pay, the key is just to get started. Even an extra $20 a month can help.

8. Figure out your bare-bones budget

To figure this out, you need to go over your budget.

You already know the minimum payments towards debt each month. Add it up, then add in other living expenses including rent or mortgage, gas or transportation, food and groceries, and insurance premiums. Review your recent bank account statements to see where your money has been going.

After your necessary expenses, look at what’s left over from your paychecks each month — this is your disposable income. This is money you can decide how to use because it doesn’t have to be spent on bills.

It’s possible that there might not be much left over. Maybe you’re in the red just from covering necessities, and that’s how you got into debt in the first place. In our case, my husband’s salary was barely enough to cover basic living expenses and bills.

Don’t get too stressed at this point. You can still try other ways to come up with extra funds for repaying debt.

9. Find savings on fixed expenses

Next, it’s time to look for ways to cut the fat from your budget. Even with the “needs” in your budget, there can be ways to save.

Audit your spending and look for ways to downsize and cut back. It won’t be forever, and if you find ways to save on recurring costs, you’ll keep reaping the rewards each month.

For us, this meant finding the cheapest apartment in a neighborhood close enough to my husband’s workplace that he could commute by bike. Our rent was (relatively) affordable, and we could remain a one-car family (which we still are to this day).

We also shopped around for better prices on monthly bills like phone service and car insurance.

10. Control your spending

If you have some disposable income but always seem to spend it, track where this money goes. What are the wants or non-necessities you’re always shelling out for? Can you reduce or skip these expenses to pay off debts instead?

I had been keeping my hair short enough to require a haircut every six weeks. But at $70 a cut, plus tip, I could no longer justify this cost. It was time to let it grow out. I also targeted spending on clothing, dining out, and non-essential groceries.

And the negative feelings surrounding my debt helped keep my spending in check. Because I was so anxious about my debts (and money in general), I was on edge anytime I bought anything.

This wasn’t exactly pleasant, but it did increase my awareness of each dollar that went into and out of our bank accounts. And that made shopping feel less rewarding than saving.

11. Increase your income

There is only so far you can cut back before you hit a barrier on your actual cost of living. That’s when it’s time to find extra money on the other end of the equation: increasing your income.

If income is the problem, hunt down opportunities to grow it:

  • Increase your pay at your current job. Offer to pick up overtime or ask how you can work toward a raise.
  • Hunt for new jobs and opportunities to see if you can get a competing offer with a higher wage.
  • Consider starting a side hustle or second job to boost your earnings.

This was the basis of our whole financial crisis. I already knew my solution for how to pay off debt: I needed a job, like, yesterday. Now I found new motivation to fight my unemployment.

I started treating my job search like a job. I spent at least six hours a day hunting down job leads, sending out applications, and following up. Finally, I got an offer — with a decent salary that nearly doubled our income.

12. Put “extra” money toward debts

When additional money comes along by chance, smart budgeting, or new income — keep your spending at the same level. Instead of spending more, pay off debts with extra money from:

  • Cash gifts
  • Savings from cutting expenses
  • Months with a third paycheck (if paid biweekly)
  • Bonuses or raises
  • Income from second jobs
  • Tax refunds

After I had been hired, we loosened our budget just enough to ease the worst of our financial stress. But we stopped there, making it a point to live on half our income. We used the rest of our earnings to rebuild savings and pay extra on our debts.

13. Choose the debt strategy that works for you

You know which debts are the ones you should pay off first — the one with the highest rates or that are in collections. As mentioned above, the debt snowball method is a popular one for debt repayment that can give you the quick wins you need to stay motivated.

But there are a few other popular debt strategies you can use to target your most dangerous debt:

  • Debt avalanche, which targets debts with the highest interest rates first. This saves you the most in interest over time.
  • Debt snowflaking, which is about making smaller, incremental payments toward debts.
  • Debt chunking, where you make extra payments in large lump sums.

Each of these debt repayment strategies has its benefits and drawbacks. The most important factor in choosing how to pay off debt, however, is you.

While the debt avalanche saves the most money over time, that doesn’t automatically make it the best strategy if you find it hard to stick to. Many people find the quick wins of a debt snowball give them an important reward and boost their commitment to debt repayment.

Be honest with yourself and how you approach your money. Take the time to consider which strategy will keep you motivated.

I had a hard time unwinding my financial anxiety. I paid a little extra toward our debts each month but was too timid to make the max payments possible.

But after a while, we had saved a bit and had more of a buffer in our bank account. Then I felt comfortable “chunking” our debts with larger, one-off payments. Seeing our debts drop by thousands at a time was an awesome high. Plus, it got me craving more.

14. Stay motivated and track your progress

While you will have some wins as you work to get out of debt, there can be months at a time where the progress feels slow.

Tracking your progress and keeping your eyes on the prize will help you stay on track. Try to mix things up if you hit a slump in your get-out-of-debt plan.

  • Use a debt payoff app to track your progress and play with different payoff methods.
  • Set a regular financial check-up to review your debts and adjust your budget.
  • Get a debt pay-off buddy to keep you accountable and encourage you when the going gets rough.
  • Create a physical way to see your progress toward debt repayment. Maybe put up post-it notes on a door with each square representing $100 in debt — and you get to take one down for each $100 you repay.
  • Pair debt payments with a reward through temptation bundling.
  • Read other people’s debt success stories to get inspiration and remind yourself of your goals.

15. Push through setbacks

As you work toward repaying debts, there might be problems that crop up and set back your goals, such as an emergency expense or hardship like unemployment. Don’t be afraid to make adjustments when necessary so you can work to recover and get your finances back on track.

Just a couple months after I started at my job, my husband’s hours got cut from full-time to 25 hours a week. It was discouraging and derailed our debt repayment.

But we adjusted our budget and scaled back spending. And my husband picked up a freelance job to compensate for his lost income, while also looking for a new position.

Since we had already worked on our finances and kept our expenses low, we were much better prepared to weather this setback. Instead of panicking, we could take this pay cut in stride.

Within a few months, my husband had a new job — and we’d managed to eliminate our $5,700 in credit card debt. Not bad for someone who was curled up in the fetal position about her debts only a year prior.

Pay off debt for the payoff of financial freedom

If your debts seem like a huge deal, it’s probably because they are. Instead of reacting to financial stress with overspending or flawed financial coping mechanism, be proactive. You will get results.

In the five years since my debt wake-up call, I’ve repaid over $35,000 on those debts. Plus, I learned a lot about myself and my money management as I worked to pay off debts.

Take it from me: working on how to pay off debt is well worth the reward of financial freedom, peace of mind, and healthier money habits.

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