How to Manage Debt to Become Debt-Free

Tip No. 1: Always pay on time – never juggle bills

In order to maintain your credit score, you must meet the minimum payment requirements on all your debts every month. Missing any payment will result in penalties that only add to what you owe. If you miss a payment by more than 60 days, it will create a negative item on your credit report. Credit history is the single biggest factor used to calculate your credit score. So, one late payment can have a significant impact, in some cases decreasing your score by 100 points or more.

This means that the foundation of any plan to manage debt must be to meet your payment requirements every month. If you can’t find a way to do that on your own, you must seek help immediately. Don’t procrastinate and let your debt ruin your credit.

Tip No. 2: Talk to your creditors to negotiate lower rates

The first step you should take to make it easier to manage your debt is to reduce the interest rates applied to it as much as possible. This minimizes the cost of getting out of debt and makes it easier to get to zero faster; you can focus on the principal (that’s the actual debt you owe). That means calling your creditors to negotiate a lower interest rate on each of your accounts.

Find more tips for effective interest rate negotiation »

Tip No. 3: Focus on one debt at a time

If you don’t want to use special repayment options, you need to implement a strategic debt reduction plan. This means focusing as much cash as possible to paying off one credit card debt at a time. You generally want to focus on the debt with the highest APR first.

Watch this video to learn more about debt reduction strategies:

Run some numbers to see how long it will take to get out of debt. You can use a debt calculator to compare minimum payments to making larger fixed payments.

If you see it will take longer than 36 payments to become debt-free, you may want to consider some special repayment options. These relief options can make it easier and more cost-effective to repay what you owe.

Tip No. 4: Consider, but don’t abuse balance transfers

If negotiation doesn’t get the rate results you want with your accounts, you may want to consider a debt transfer. This is where you open a new credit card specialized for balance transfers. It allows you to transfer existing balances for a nominal fee. The benefit is that these cards offer introductory periods of 0% APR, where you can pay off debt interest-free.

The length of the introductory period varies based on your credit score, usually from 6-18 months. The goal is to eliminate all the debt you transfer, plus the fees, before the end of the introductory period. Calculate carefully to transfer an amount of debt you can reasonably expect to pay off before the introductory period ends.

If you do a balance transfer for only a portion of your debt, make this card the first one that you focus on eliminating. It will save you money since the payments are completely interest-free.

Tip No. 5: Cut back on discretionary expenses

Debt reduction and balance transfer payoffs are more effective with more cash. So, the more you can cut back on other expenses, the more cash flow you have to get out of debt. Here are a few tips for cutting back:

• Minimize streaming entertainment accounts (movies, TV, music, gaming)
• Cancel or suspend services that you can do yourself (landscaping, pool care, house cleaning)
• Reduce the number of times you dine out and take your lunch to work
• Cancel your gym membership and work out at home

Always keep in mind that cutting back as much as possible accelerates your debt management plan. However, don’t do the financial equivalent of a crash diet; it can lead to spending splurges. Always aim to make a plan that you can maintain.

Tip No. 6: Don’t neglect your savings

One thing that you shouldn’t cut out to eliminate debt is savings. You should always make an effort to save; think of it like a bill that you owe yourself. Ideally, you want to save about 5-10% of your take-home income per month. However, you should at least be saving something each month. Otherwise, living paycheck-to-paycheck puts you one emergency or unexpected expense away from more debt.

You need to have savings and contribute to savings in order to cover unplanned expenses in emergencies. This means that you should not cut savings out to pay off debt. You shouldn’t have to spend every penny to get out of debt effectively; if you have to, it means you need another solution.

Tip No. 7: Increase payments as you free up cash flow

Each time you eliminate a credit card debt, you eliminate that bill. That gives you more cash to pay off the next debt. Although you can use the freed-up cash to reinstate discretionary expenses or relax your need to budget, it’s better to roll it into paying off your debts.

Stay committed to repaying your debts and knocking out your balances.

Tip No. 8: Compare debt consolidation loan repayment

Besides balance transfers, you can use a debt consolidation loan to consolidate debt. This is a low interest rate personal loan that you use to pay off your credit cards. You zero out all your credit card balances, leaving only the loan to repay.

With good credit, you can qualify for a low interest rate around 5% – you at least want a rate under 10%. Go online to check current loan rates, then compare the estimated cost to other options. Even with the loan, go for the highest payments you can afford to pay off your debt as quickly as possible.

When you compare options as you construct a debt management plan, focus on two factors:

1. Time to payoff
2. Total cost (including interest charges and fees)

This takes some calculation, but it’s essential to get the most cost-efficient and timely repayment plan possible.

Tip No. 9: Stop charging until you pay back what you owe

The last thing you need is more debt to repay while you’re in the process of paying it off. That means that you must commit to stop charging while you focus on managing debt. You don’t have to swear off credit cards forever, but you at least need to get back to zero first. It’s the only way to get back to the point where you can use credit interest-free.

Even if you use balance transfers or consolidation loans, resist the urge to charge until you pay the debt off. Otherwise, you run the risk of running up new balances and making your debt problem worse instead of better. Your goal was to reach zero so you can regain stability, not to fall back even further into debt.

Tip No. 10: Deal with the service provider for medical bills

Besides credit card debt, you may have unpaid medical bills to repay, too. Medical collections are big business and a big cause of credit damage for millions of Americans. So, you need to incorporate medical debt repayment into any plan to manage debt.

Here are some tips for dealing with medical debt:

• Review the original bill carefully to ensure there aren’t any mistakes or charges for services you didn’t receive
• Always try to deal directly with the original service provider to see if you can work out a repayment or settlement plan

Find more tips for managing medical debt »

Tip No. 11: Never turn to alternative financing solutions (AFS)

Alternative finance solutions refer to any nontraditional lending source; it’s basically any no-credit-check loans, like payday loans. These financing options offer instant approval with no underwriting, so you can get approved even if you already have more debt than you can handle. The problem is that the finance charges are high – usually $30 for every $100 financed. In addition, the interest rates can get extremely high, as in above 300%.

Although you may be tempted to use AFS if you can’t get other financing, don’t do it! Payday loans and other AFS options only make a bad situation with debt worse. They can seem like a good idea to fill a cash need quickly. However, when you’re already struggling to make ends meet, there’s little chance you’ll pay the loan back before those notoriously high finance charges and interest rates kick in.

Tip No. 12: Avoid actions that leave you worse off

What you don’t want to do while working to manage debt is to take steps that put you in a weaker financial position than when you started. There are several ways you can pay off credit card debt that hurt your overall financial outlook.

1. Don’t dip into your 401(k) or another retirement account. If you have a 401(k) through your employer or an IRA privately, don’t tap it to pay off your credit card debt. That money needs to stay put to grow so you have financial stability later in life. Using your funds now leads to early withdrawal penalties. And even if you put the money back after you recover, you lost that time for growth. It’s usually not worth the debt elimination benefit for the savings you lose.
2. Don’t covert unsecured debt to secured debt with a home equity loan. A home equity loan allows you to borrow against the equity built up in your home; that’s the property value minus the remaining balance on your mortgage. Some people use this option because it’s easier to get a low interest rate with a weaker credit score. However, that’s because it uses your home as collateral. If you start to miss the payments on this loan, the bank can foreclose and take your house. It’s just not worth the added risk.

Tip No. 13: Be prompt in admitting a solution isn’t working

If you try something and you see that it’s not working, don’t wait to try something else. Remember, the longer you procrastinate and delay paying what you owe, the more money you waste on interest charges and the deeper you go into debt. Time is not on your side when you have debt to pay.

If you try and debt solution and it doesn’t provide the benefits you need, don’t wait try something else. If a balance transfer introductory period is about to end and you still have a balance, look at consolidation loans. By the same token, if you can’t keep up with loan payments, don’t wait for default to seek help.

Tip No. 14: Don’t let emotion keep you from asking for help

For the most part, people usually prefer to solve debt problems on their own. However, that’s not always easily done. In many cases, reaching out for professional assistance is faster, easier and more cost effective than solving debt problems on your own. So, if you exhaust all the tips above and you still can’t find an effective way to pay back what you owe, ask for help.

Don’t let pride, feelings of embarrassment at your situation, or mistrust of outsider prevent you from getting the help you need. Just make sure that the company you work with is reputable, well-rate, with a proven record of help.

One of the most effective solutions people use if they can’t solve debt problems on their own is consumer credit counseling.

Learn more about credit counseling »

Tip No. 15: Make sure to check your credit once you’re done

No matter what your plan to manage debt looks like once you have it crafted, always check your credit once it’s done. Financial distress is usually not easy on your credit score, but getting out of debt is. That means that you need to check your credit report once you finish to make sure it reflects your new debt-free status.

1. Check to make sure all account statuses are paid and current
2. Make sure any missed payments were actually missed
3. Review collection accounts to see that they were either removed or listed as paid; also check to make sure you didn’t miss anything that slipped into collections.

Basically, you’re looking for mistakes and errors that could still hurt your credit score. If you find any, dispute them to have them removed. Then, start rebuilding your credit if the period of hardship led to any damage.