How do you get out of debt? It’s a question lots of people are asking these days, and the reality is that the answer depends on what type of debt you have. For example, you may need a different strategy if you have 3 maxed out credit cards than if you have a student loan and medical debt.
But not to worry! Below we’ll outline some strategies you can use for each type of debt:
Tools for Getting Out of Debt
First of all, you must be aware of some tools that will be helpful – no matter what type of debt you have – on your journey to being debt free. One tool is Steve’s own Amazing Get Out of Debt Calculator. The calculator can help you identify solutions that will be useful to you and compare different ways of paying off your debt.
Other tools that you should be using are (1) a budget of some kind (after all, you need to control your spending in order to pay off debt) and (2) a spreadsheet for tracking your debt payments and due dates. This is very important because if you don’t organize your debt you may feel overwhelmed by it, and you might miss payments, which can hurt your credit score. If you want an online tool for this, you can use ReadyForZero.com, a free tool for paying off debt online.
Credit Card Debt
Credit card debt is the most common type of debt. And it can also be the most persistent! When it comes to paying off credit cards, there are a few strategies. One strategy, known as the Debt Snowball, is to focus on the card with the lowest balance first and try to pay off that balance as quickly as possible. The theory is that you’ll gain momentum from having early successes and that will lead you to stick with it long enough to eventually pay off all your debt.
The other main strategy is to focus instead on the card with the highest interest rate because that will save you the most money in the long run (you’ll have fewer interest charges). However, no matter which strategy you use, it’s a good idea to do one thing at the very beginning: try to find a lower interest rate. Sometimes, if you have good credit and a history of paying on time, your credit card companies will lower your interest rate if you call and politely tell them you’re comparing rates and would like them to lower your rate.
Even if they won’t lower your rate, you could take another step, which is to research balance transfer offers. Some people will qualify for good balance transfer offers that allow you to switch to another credit card and pay a lower interest rate on the debt you move over. Just keep in mind that some of these offers contain hidden fees in the fine print! For example, they may charge a higher interest on new purchases made. So be sure to carefully read the terms before you sign on the dotted line. For more information, take a look at our Credit Card Debt resource center.
Student Loan Debt
As you probably know by now, student loan debt is a growing problem all across America. More and more people are graduating with student loan debt and they’re unsure how they’ll pay it all off. If that applies to you, then one of the first things you should know about is the existence of some federal student loan programs that can help ease your loan burden.
There is a program called Income-Based Repayment that reduces your monthly payments to 15% of your monthly income (or less). This can really help those who are struggling to make their payments each month. However, you should keep in mind that you’ll pay more interest in the long run if you utilize the Income-Based Repayment option.
There is also a great program called the Public Service Loan Forgiveness program, which provides a way for graduates who decide to work in lower-paying public and non-profit jobs to get rid of their debt. The way this program works is you have to apply and then continue to make payments on time. After 10 years in your public service job, your debt will be forgiven by the government. Poof… all gone!
There are other options that may be helpful, such as consolidation, which combines all your loans into one. Federal loans can be consolidated through the federal government, and those with private student loans can often find a private lender who will consolidate. You can even use a Lending Club loan to consolidate. To learn more about these topics, check out our Student Loan Debt and Debt Consolidation resource centers.
If you have medical debt it can be a huge frustration, because not only are you worrying about your own (or loved one’s) health and wellbeing you have this added financial stress. We’ve talked to many people in this situation and it often breaks our hearts. What we recommend for paying off medical debt is ABOVE ALL remember that you have some leverage to negotiate.
For one thing, when a medical bill comes in the mail it is usually accompanied or preceded by an Explanation of Benefits (EOB). You should look through the EOB to see if anything was not covered by insurance and what the explanation is. Sometimes mistakes are made and you are accidentally billed for something that should have been covered by your insurance. Use your insurance company’s website to cross-check and if you think you spot an error, call your provider immediately. You can even ask them to delay the bill by 30-60 days in order to investigate the error.
And you should also know that medical debt can almost always be split up into manageable monthly payments – usually with no interest! Be sure to ask your provider about no-interest repayment plans.
Hopefully the advice in this article will help you conquer your own debt, no matter what type of debt you may have! If you have further questions, feel free to ask us in the comments.
Benjamin Feldman is a personal finance writer for ReadyForZero.com and recently he paid off his own credit cards. He writes about how to get out of debt and other related topics at the ReadyForZero blog.