Debt happens. If you’ve ever borrowed money to go to school, buy a home, cover an emergency, or buy basic necessities, you may be having a hard time getting out of debt. But you’re certainly not alone. In Spring 2021, the total household debt in the U.S. hit a high of $14.6 trillion.
Average American debt by generation
The average American has $90,460 in debt, which includes different types of debt like credit cards, personal loans, mortgages, and student debt.
Just look at the average amount of debt by generation:
- Gen Z (1997 – 2012): $16,043
- Millennials (1981 – 1996): $87,448
- Gen X (1965 – 1980): $140,643
- Baby boomers II (1955 – 1964): $97,290
- Baby boomers I (1946 – 1954): $41,281
When you have debt of any amount, it can feel like the odds are stacked against you when it comes to paying it off. It may take some time and a hard look at your finances and financial habits, but it is possible to get off the hamster wheel of debt.
To help you get some clarity in creating a path to better finances, check out our list of tips about how to get rid of debt once and for all.
How to pay off debt step-by-step
Ready to get out of debt? If so, check out our steps to creating a plan to pay off debt and achieve financial freedom.
1. Learn the full scope of your debt
If you’ve been dealing with your mounting debt by simply pretending it doesn’t exist, the first thing you need to do is compile a thorough list of all your debts. It may sound daunting to face your debt head on, but it really is a band-aid that you need to rip off—the sting doesn’t last very long, we promise!
Start by taking out your budget—if you have one—and collecting all your bank and credit card statements from the past six months. Then, jot down each recurring loan payment, bill, account in collections, credit card, and any additional set expenses.
In addition to listing all your debts, include these essential details:
- The interest rates on your loans
- The loan terms
- The monthly payment amounts for your loans
- The interest rate for your credit cards
- The minimum monthly payment for your credit cards
You should also note if any of your debts are in deferment or on a special repayment plan.
2. Organize your debt
After you make a list of your debts and details, use the list to help you prioritize what debts to tackle first. You can organize your debt in several ways to help you pay it off quicker and more efficiently. But the best way to pay off debt depends on your unique financial situation.
Experts suggest tackling debts in this general order: high-interest debt first, non-deductible debt, low-interest debt next, and tax-deductible debt last.
3. Assess the areas of improvement
To make sure you understand the full depth of your financial situation and that you haven’t missed anything, check your credit report from each of the three major credit bureaus—Experian™, Equifax®, and TransUnion®.
It’s essential to check each report because some lenders don’t report credit activity to all three bureaus. If you only check one or two of the three, you might miss important details. Check each report for your credit score, all of your current loans, lines of credit, issues you need to address, and possible mistakes from the lender.
Pro tip: You can access one free yearly copy of your credit report from each bureau through AnnualCreditReport.com.
4. Make a plan for paying off debt
Personal finance is, well, personal. There’s no one-size-fits-all solution for paying off debt. After you list all the steps we’ve mentioned, research different strategies to help you understand how each method works and what makes the most sense for your financial situation. To help you get started, we’ve created this list of eight of the best ways to get out of debt.
Adjust your budget
In your quest to get out of debt, consider your budget to be your North Star. It’ll be a great jumpstart in your journey to being debt free. By adjusting your current budget, you can free up money to use towards your debt.
To get started, review each item on your budget and arrange them according to their level of necessity. When you review each item, ask yourself: Is this a need or want? Highlight items that are more of a want—items you can reduce or cut out completely. Once they’re gone, use the money you just freed up to tweak your budget and pay off your debt faster.
Contribute more than the minimum payment
If you adjust your budget and you’re able to free up some extra money, use it to contribute more than just the minimum on your debt payments. Paying more than the minimum will help you save money on interest and can also help you get out of debt sooner.
For example, let’s say you have a $10,000 balance on a credit card with a 15% interest rate and a $250 minimum payment. If you only pay the minimum each month, it’ll take you almost five years to pay it back, plus $3,949 in interest.
If you’re able to free up $100 by adjusting your budget and you use it to bump up your monthly payment to $350 a month, you can repay the debt in three years and pay only $2,449 in total interest. That’s $1,500 in savings!
Use the debt snowball method
To help reduce your debt, you can also use the debt snowball method. With this option, you pay off your small debts first. Once those are settled, you tackle the larger debts. Essentially, you need to make a list of debts from smallest to largest. Then you start by paying off the smallest one by adding in as much extra money as you can afford into each monthly payment.
As you work on paying off the debt you’re targeting, you only make the minimum payment on the other debts. Once you’re done paying off the first debt, you move onto the next-smallest debt on the list and put more money toward it until it’s done. Since you’ve paid off your first debt, you’ll have that little extra you need. You repeat the process with each of your smaller debts until you’re ready to tackle the large debts.
Pro tip: Avoid using this method if you have to pay off a payday or a title loan because these types of loans typically have higher interest rates. Pay them off first and ASAP.
Refinance your debt
To pay off your debt faster—and possibly save money on interest at the same time—consider refinancing your debt with a debt consolidation loan. This is a type of personal loan you can use to combine several debts with higher interest rates into a new loan with a single monthly payment, preferably with a lower interest rate. You can refinance credit card debt, mortgages, auto loans, personal loans, and student loans, too.
Use your financial windfall to pay off your debt
A financial windfall is a large sum of money that you may get from a tax refund, work bonus, a gift, a stimulus check, or an inheritance. You can use the money however you choose, but if you have a significant amount of debt, you could use it to pay off one, some, or all of your debts.
Negotiate a debt settlement
If you have one or several debts with delinquent or late payments and you’ve exhausted a lot of other debt payment methods, a debt settlement can possibly work for you. With this method, you negotiate a debt settlement with a debt collector so you can potentially pay your debt for less than you originally owed. In order to make this work, you need to understand the full scope of your debt. Do your research, and create a realistic proposal.
This strategy works if you have debts with payments that are at least 90 days late, and works even better if you’re more than 5 months late. However, it’s important to note that this option is risky because you need to keep missing payments as you go through the negotiation process. The more debt payments you miss, the more damage it’ll do to your credit. Plus, there’s no promise that the debt collector will accept the proposal or give you a deal at all.
Get a side job
If you have a special skill or passion, consider taking on a side hustle to help you earn extra money to pay off your debt. Luckily, in this day and age, you can usually find a side gig that allows you to work from home. If the idea of working a side gig or job sounds like too much, commit to working only a short period of time so you can earn the extra money without feeling too overwhelmed.
Work with a counselor
Sometimes, it helps to partner with someone to solve a problem, like how to pay off debt. If you’d like guidance, and you’re okay with paying some money for services, work with a credit counseling firm or nonprofit organization to help you get your affairs in order. These types of firms will partner with you to create a debt management plan, help streamline your debt payments, and possibly help you save a lot of money in interest.
So, what’s the best way to pay off debt?
The answer to that question depends on your unique financial situation and your research. Each of the methods and strategies mentioned above can all be a solid option to help you get out of debt. But, you also need to consider what debt payment method will work best for you in your current situation.