Debt

How to Get Out of Debt Fast: Complete Guide with Action Plan

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Are you looking at your bank and credit card statement wondering how you’re going to make it through the month until payday?

More than 69% of Americans have this same issue, and it seems that everywhere you turn, more people are drowning in debt than at any stage in economic history.

According to research by Experian, one of the three largest credit bureaus in the U.S, the average American carries outstanding credit card balances of $6,354 in credit card debt, and a further $24,700 in non-mortgage-related debt, such as personal and payday loans.

For those American students graduating from college, most of them leave university with a degree and over $34,000 in student loan debt.

The economic data makes it clear that many Americans are living well beyond their means, using credit to get them through the month. Those individuals that are in a sound financial position might ask themselves how anyone can afford to live like that.

However, what these individuals don’t realize is that losing your income for a few months can leave you seriously far behind in your finances, forcing you into debt as a final solution to put food on the table and take care of basic household expenses.

More than 70% of Americans admit to using payday loans to cover basic expenses like rent and groceries. Of those individuals using payday loans, most of them end up taking on nine consecutive loans in the same year to keep their heads above water financially.

With these staggering debt statistics, it not surprising that more people are filing for Chapter 7 or 13 bankruptcy.

Changing Your Financial Situation

If you’re one of the millions of Americans suffering financially with huge amounts of outstanding debt, you need to change your financial position. Sure, that’s easy to say, but it’s a necessity if you want to get your financial house in order and get your life back on track.

Like Einstein, the famous physicist said, “Doing the same thing over and over again and expecting different results is the definition of insanity.” We put together a list of practical strategies you can start implementing today to change your financial position and dig yourself out of debt.

Stop Using Credit Cards

Read: How to Stop Using Credit Cards: Complete Guide

Take Stock of Your Financial Situation

Taking stock is something that everyone needs to do once in a while. We aren’t talking about going through your pantry to make a shopping list, either. Taking stock involves taking an honest look at your financial position.

In many cases, people might try to kid themselves with this exercise, so it’s best to do it with the assistance of a professional, like a financial advisor. If you don’t have access to a financial advisor, then completing the exercise with a trusted family member outside of your immediate family unit is the best alternative option.

Start the exercise by listing all of your assets. Assets are part of your financial portfolio that determines your net-worth. More than 40% of Americans have a negative net worth, meaning that their liabilities or expenses are greater than their assets.

Assets include savings accounts, investments, and items like cars and homes that have no outstanding payments due. If you own your home outright with no mortgage, then you can count it as an asset.

However, the chances are that you don’t have any assets; you only have liabilities. Total your liabilities and add all of your debt, including the outstanding interest on any loan facilities. This exercise gives you a clear understanding of what you owe your creditors.

You might find it surprising that most Americans never bother to complete this essential exercise, and most prefer to stick their heads in the proverbial sand when it comes to the task of understanding the scope of their debts.

After totaling your debts, arrange them in order from largest to smallest. Then take the same list and re-arrange it, prioritizing the debts with the highest interest rates on the top of your list. Now you have a clear understanding of precisely what you owe and which debts are costing you the most money to service.

Understanding Interest and How It Affects Your Financial Position

When you take out a loan, the lender offers you an APR (annual percentage rate) on the loan amount, based on your credit score and lending history. Payday loans have the highest APRs, touching up to 391% in some states.

Most people don’t have a proper understanding of how APR works and what it costs them to take out the loan. In most cases, people are so happy that they receive approval for the loan, that they don’t even bat an eye at the APR. Take the credit and worry about paying it off later – that’s the mantra.

However, this is a foolish and desperate action that ends up costing you in the long run. Most borrowers end up taking out consecutive loans to cover what they owe in interest payments, leading them down a debt spiral that often ends in bankruptcy.

Therefore, it’s vital that you categorize your outstanding debts by APR in the previous exercise. Paying off these debts first is your top priority, and you’ll need to focus all of your energy on clearing these debts before you even think about recovering your finances.

APY vs APR

Read: APY vs APR: What Do They Mean & What’s The Difference?

Taking Care of Credit Card Debt

Credit cards are another source of high APR, with most lenders charging between 15 to 25% APR on outstanding balances. If you have outstanding credit card debt accruing interest, then take out a second card.

Many credit card issuers offer promotional APR periods where you don’t have to pay any interest on outstanding balances for up to 18-months.

Use a balance transfer to move the funds from the old account into the new account, and focus on paying down other sources of debt with high APR first.

Payoff Review

Read: Payoff Review: Pay Off Your Credit Card With a Consolidation Loan

Change Your Spending Habits

After taking care of your high-interest debt, it’s time to turn your attention to your monthly expenses. Do you know how and where you spend your money? Part of being financially responsible is accounting for every cent that you spend.

The best way to track your monthly expenses is by using a budget. A budget shows you where you’re spending your money, giving you feedback on where you can tighten your belt to reduce your expenses.

Download a financial management app like Mint to help you with this task. Mint allows you to enter expense categories and subcategories for expenses, and it syncs with your bank accounts to track your spending.

Best Finance Apps

Read: The Best Smart Phone Apps for Managing Your Finances

Mint also imports 2-months’ worth of historical data from your accounts, giving you an immediate start on identifying where you can save money in your monthly budget. Analyze the data and ask yourself where you can cut back on your expenses. For instance, do you need that second or third Starbucks on the way to the office?

Sometimes, the smallest expenses we have can make a significant impact on our finances. You might not think that spending an extra $5 on coffee each day is a big deal. However, that $25 a week, or $100 a month, that you’re spending on something you could make at home and take with you in a travel mug.

How often do you eat lunch at fast-food restaurants? Why not bring your lunch from home and save your money instead? Being frugal with your expenses might seem like you’re cheap. However, if it gets you out of debt faster, and instills better financial habits, then it’s worth the effort.

Stop the Bleeding

Where else are you spending money that you could be paying toward your debts?

Items like streaming services chew up your income, and many people never bother to use them anyway. Do you need a subscription to three streaming services? Why not cut back to one, and see how you do with it for a month?

If you’re struggling to meet your lease commitments on your car, consider trading it in for a cheaper model. Sure, cars are a status symbol, and everyone wants to drive a new BMW, but is it serving you to do so?

Cutting back is one of the most effective ways of reducing your spending and clearing out your debt. You can also apply this to your living situation, as well. Finding a cheaper apartment can save you thousands of dollars over the year, allowing you to reach a debt-free status faster than you expect.

What about your cellphone plan? Do you need that upgrade to the new Apple device? Leasing a new phone can account for as much as 80% of your cellphone bill. Moving to a pay-as-you-go provider with a month-to-month contract can save you hundreds of dollars if you continue to use your old phone instead of taking a new model.

If you manage to find ways to cut back your expenses to save $500 a month, that’s $6,000 you have available to pay off your debt throughout the year.

Living Below Your Means

Read: The Complete Guide to Living Below Your Means 

Know Your Credit Score

Your credit score plays a significant role in your finances. In the section on APR, we mentioned that lenders assess you for your APR rate, based on your credit score and lending history with the institution.

If you have a good credit score, you receive the best APR rates from lenders, and you can start to renegotiate your financial position. If you start cutting back and saving money, the chances are that your credit score will improve.

The three big credit bureaus, Experian, Equifax, and TransUnion, collect data from credit agents like banks and lenders, assessing your creditworthiness every month. The bureaus issue you a score based on your performance in 5 critical areas.

  • Do you pay your bills on time?
  • How much debt do you owe?
  • How much of your credit facilities do you use?
  • How often do you apply for credit?
  • What kind of credit facilities do you own?

If you pay your bills on time and you keep your credit usage under 30% of the available facility, your credit score will start improving. This improvement gives you leverage with the banks and credit card issuers. You can call then and negotiate your APR rate, asking them to reduce it due to the improvement in your credit score.

As a result, you’ll end up saving in interest payments, digging you out of debt faster. The three credit bureaus allow you to download your credit report for free once every calendar year. Most of the bureaus and lenders work with your FICO score, so that’s the score you need to focus on improving.

Some credit card companies and financial apps like Mint, also let you access your credit score every month, letting you track the increase in your score as you improve your financial position.

Credit Karma Review

Read: Credit Karma Review: Get Access to Your Credit Score for Free

Enter Debt Counseling

Some people might find themselves so deep in debt that they start to enter a debt spiral that destroys their lives. People might tell you that money isn’t the only thing in life, but that’s because they have plenty of cash in their bank accounts and minimal debts to service.

Speak to anyone that’s drowning in debt, and they’ll tell you that money means everything in life, and if you don’t have it, then life is hard. Without enough money in your bank account, it’s easy to fall behind on your obligations fast, making your life a living hell.

No-one deserves to live with financial stress in their lives. Therefore, sometimes, the only solution is to admit that you made a mistake and seek help.

Debt counseling programs connect you with financial professionals that help you get a hold of your financial position. Counselors will negotiate with your creditors on your behalf to arrange a payment you can afford to make each month.

Debt counseling might sound appealing, but it places limits on what you can and can’t do with your money, and it’s sort of like having your parents manage your finances, taking the control away from you. This action prevents you from doing anything financially irresponsible that might further jeopardize your financial position. Eventually, after paying off your debts, the counselor will let you start to control your money.

Avoid Bankruptcy

Desperate times call for desperate measures. Many people that find themselves drowning in debt, decide that the only way they can make it out of the financial hole, is trough filing for bankruptcy. Chapter 7 and 13 bankruptcy applies to individuals, while Chapter 11 bankruptcy is for legal entities like businesses.

When you’re so financially down that you have no other option; bankruptcy might seem like a great way to dissolve your outstanding debts. If you file for Chapter 7, then the court reviews your case in the presence of a bankruptcy attorney. If they approve you for bankruptcy, then the court wipes the slate clean, absolving you of any outstanding financial obligations to creditors.

With Chapter 13 bankruptcy, you also go through a legal process with the courts, but instead of dissolving your debt, they take an approach that’s similar to debt counseling. A lawyer calls your creditors and arranges a payment plan on your debts, allowing you to pay back the money you owe at a rate that’s affordable for you to manage.

Bankruptcy might sound fantastic at this point, especially if your financial position seems unmanageable at the moment. However, you should avoid filing, if at all possible.

Once you enter bankruptcy, it’s a permanent stain on your credit record. As a result, you’ll find it next to impossible to secure any form of financing in the future. However, while this sounds bad enough, other drawbacks are even worse.

How to File for Bankruptcy

Read: Bankruptcy Explained: How to File for Bankruptcy

You might find it challenging to secure a lease on an apartment, or even get a new job with a bankruptcy against your name. Landlords will download your credit report and see that you filed for bankruptcy. Needless to say, they might not be comfortable leasing you the apartment if they think there’s a chance you might default on your rent payments.

Employers also don’t like to hire employees that have a previous history of bankruptcy. The employer might think that you’re financially irresponsible, and you might put the company in jeopardy if you end up underwater in your finances.

You might even find it challenging to secure insurance. If a lender does decide to take a risk on loaning you money in the future, you can bet it will come with a sky-high APR to discourage you from overextending yourself financially.

Increase Your Income

If you find yourself swimming in the deep end of the debt pool, then the most effective means of digging yourself out of the hole is to increase your income. Most Americans spend more than they make each month. So, the pragmatic solution to solve your problems is to earn more money.

The information age, and the advent of the internet and smart devices, put a world of employment at your fingertips. You can download apps and start earning extra cash. How much of your day or week do you waste?

If you work a 9 to 5 job, and them come home and relax on the couch for the rest of the evening, you’re burning daylight that you can’t afford to waste. Let’s say you get home from the office, finish dinner, and then hit the couch for your favorite TV shows. You retire to bed at 11 pm and then repeat the cycle.

Make Money Online

Read: How to Make Money Online at Home: Complete Guide

On the weekends, you take the time to relax and catch up on all the leisure activities you missed out on during the week. While this might sound like a good plan for someone that financially stable, if you have debts, then you’re wasting your time.

You’re wasting 5-hours Monday to Friday, and then at least 16-working hours on the weekend. That’s 42-hours each week that you could dedicate to earning more money.

The Gig Economy allows anyone with a cellphone the opportunity to earn more income. For example, if you own or lease a car, you could apply to be an Uber driver and make money giving people rides in your spare time.

Research shows that Uber drivers earn between $15 to $20 per hour. If you drive for 60% of your spare time, that’s nearly 25-hours a week, or $375 to $500 extra that you could be earning each week. How would that money change your financial position?

Increasing your income is the fastest way to get yourself out of debt, but many people never even think about getting a part-time job, and they’d rather file for bankruptcy and ruin their financial future instead. Think outside of the box and get a second job that brings you more income.

Guides to Help You Make Money

Wrapping Up – Increase Your Financial Literacy

Many Americans have no clue about financial literacy – and that not their fault. When we enter the school system, we learn all about math, language, history, and geography. However, no-one ever teaches us about preparing ourselves to handle our finances or build a budget.

It’s no wonder that the majority of Americans are in debt. Most of them have no idea of how money works, and they don’t understand the effects of how debt can destroy you and your family if it reaches unsustainable levels.

Out-of-control debts destroy families and break the most hardened individuals. The only way to combat this situation is through learning about financial responsibility by increasing your financial literacy.

Read everything you can find on the topic. Robert Kiyosaki is the author of the book “Rich Dad, Poor Dad,” and this book is an excellent start to building your financial literacy. Search through platforms like YouTube and personal finance sites for information that’s useful to your situation.

Hopefully, through applying the information in this article to your financial situation, you can dig yourself out of debt, without applying for bankruptcy. When you’re first starting on your journey to be debt-free, it might seem like an impossible task.

However, by taking it step-by-step, you’ll slowly reverse your financial position until you eventually end up debt-free. Good luck.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.oliver@moneycheck.com


Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank or credit card issuer and have not been reviewed, approved or otherwise endorsed by any of these entities.


Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.


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