Six Ways to Get Out of Debt That Work

If you’re carrying credit card balances it’s important to pay them off as fast as possible. It’s important because credit card debt is expensive. The longer you pay credit card interest, the less your future saving/purchasing power will be. Credit cards seem like a good idea when you’re looking to buy that big screen TV. They don’t seem like that great an idea when you’re still paying for that TV ten years later. Here are several ways to get out of debt. Budget is the most important consideration when determining the which way to get out of debt best meets your needs.

Snowball Method

The snowball method will pick up speed after each debt is paid off. The idea is to use add the monthly payments from the debt(s) you pay off to the next debt you’re working to pay off. As each debt is paid off the size of the monthly payments (and the speed of payoff) improve.

Here’s how to do it. List out all of your debts and put them in sequence from the smallest balance to the largest balance. If you don’t have any extra funds in your budget to put onto your debts when you start out, you need to cut some expenses to free up some extra funds each month. The more money you can free up for debt payment, the better. However, even if you only free up $5 or $10 per month at first that will help get the snowball rolling. Focus on getting the smallest balance account paid off first – this is your target account. Pay only the minimum monthly payment on all of the other accounts. If you can come up with extra funds you want to put toward your debt form time to time, they should always be paid on the target account, not any of your other debts. Once your target account is paid off, you add what you were paying on that account every month to the minimum payment for your new target account. This is the best way to get out of debt if you have enough in your budget to add to your minimum monthly payments.

Debt Consolidation Mortgage

This really isn't a way to get out of debt because it doesn't reduce your overall indebtedness. It can help to pay off credit card debt. It moves the unsecured credit card debt into a refinanced first mortgage or a home equity loan. The advantage to doing this is that it does lower your overall monthly payments because your mortgage interest rate is going to be lower than your credit card interest rate. A major down side to this approach is that if you get into trouble and can’t make your payments your home is at risk. It is very common for people who do this to end up back in credit card debt within a few years because their credit cards have available balances on them. Don’t use this method if you don’t think you can keep your spending under control.

Unsecured Debt Consolidation Loan or Credit Card Balance Transfer

Like the mortgage solution, these solutions are not really ways to get out of debt. They just get the credit cards paid off. You’re left with the same total amount of debt (or more) in a different account. You also leave your credit card balances open once they’re paid off by the loan or the balance transfer and this leaves you the temptation to use them. Don’t use this method if you can’t control your spending.

The big difference between this and the mortgage method is that you don’t have to own a home or have equity in your home. The interest rate on an unsecured loan will generally be higher than the rate for a mortgage. It’s important to do the math on the loan fees or balance transfer fees and the long term interest rate to make sure that you actually come out ahead on this one. Most of the time you can get a low introductory balance transfer rate than converts to a long term rate at a later date. This might still save you money and get you out of debt faster but sometimes it won’t. The fees plus the long term interest might add up to more than you would have paid if you’d just left your credit card balances where they were.

Debt Management Program

This kind of program is a good way to get out of debt for someone who has gotten behind temporarily. Maybe you lost a job, now you’re back to work and you’re able to pay the normal payments but can’t get caught up on the payments you missed while you weren’t working. When you join a program like this your credit card accounts are closed and you pay the debt management agency a set payment every month. They make the payments on the credit cards for you out of that money. These programs might be able to get you a lower interest rate or eliminate late fees and a few other things. Your credit card debt can get paid off a little faster this way than by making the minimum payments. If you haven’t fallen behind the snowball method is a better way to get out of debt than debt management programs.

Debt Settlement Program

Consolidating credit card debt in a debt settlement program is a way to get out of debt for folks who have a financial hardship and can’t make their minimum payments. It’s excellent for people in that situation who want to get out of debt but don’t want to declare bankruptcy. People with this type of situation are not typically concerned about the ramifications to their credit report because their hardship prevents them from making their payments on time anyway. Here’s how it works – you put money into a “settlement account” at a bank each month and you accumulate the funds there until you have enough to do a lump sum settlement on your first account (for example, 30-50% of the balance) . You negotiate a settlement with that creditor and that credit card debt is wiped out when the settlement is paid. The payment depletes the funds in the settlement account. You repeat the process of accumulating funds and negotiating settlements until you’ve all of your debts are satisfied.

Bankruptcy

If you want to wipe out credit card debt once and for all you could do it through bankruptcy. This is an extreme way to get out of debt. It should be the last resort when you can’t afford any other way to get out of debt.

You need to have a financial hardship and you have to get some credit counseling. A bankruptcy attorney can tell you which type of bankruptcy you qualify for. In simple terms the two most common types of bankruptcy are named after the chapters of the bankruptcy code that describe them. Chapter Seven is where your assets are liquidated to pay off what can be paid and the remaining debt is simply wiped out. Chapter Thirteen is a repayment workout where the court decides how much each creditor is going to be paid. You then make monthly payments to a trustee and when the court determined payments have been made, the debts are discharged. Once your bankruptcy is discharged you are no longer liable for the debts, they’re wiped out. Bankruptcies stay on your credit report for 10 years.

There are several ways to get out of debt. Your budget determines which one is appropriate for you.