It is important to first want to get out of debt, but perhaps the biggest and most challenging step is to take action to get out of debt.
The best way to get out of debt is to start by making a plan. Start with small but important steps first, this attitude will lead to bigger steps and pretty soon you will find that you have eliminated your debt.
When credit lines are maxed out it can be difficult to figure out how to get out of debt. The key is to figure out which accounts you should pay, in what order you should pay them, and how much you need to pay to eliminate your debt. By attacking each of these hurdles one by one, you will create a plan that you can achieve to get out of debt.
Here’s the plan:
1. Calculate your total debt
Start by figuring out who and how much you owe. First, get a copy of your credit report because it will list all of your financial obligations, these are the ones creditors will use to determine your financial trustworthiness. You may also have other debts that are not listed on your credit report, get copies of those statements as well.
On a single sheet of paper write down the name of each creditor, total amount owed, monthly payment, and interest rate for your accounts. Depending on your goals for getting out of debt, you may want to consider only bad debt, such as credit cards and small loans.
2. Prioritize your creditors
Now you need to figure out who you want to pay first and how you want to pay them.
The best creditors to start paying off first are the ones charging you the highest interest rates. Rank your debts in order from highest to lowest according to interest rate. This is the order you’ll repay your debts.
If your high interest debts also have high balances, you could end up paying on a single account for months before the entire balance has been repaid. Instead, many people prefer to pay smaller debts first because it cleans up the credit report quicker and it keeps them motivated to pay off debts.
The choice is yours to decide who you want to pay first. Whatever option keeps you motivated is the right choice for you.
3. Determine how much you can pay
Start by totaling your income from all reliable sources including wages, alimony, child support payments, bonuses, or dividends. Then, subtract what you spend each month on all your expenses to figure out how much free cash you can have to pay down your debts.
Download this Budget Worksheet to figure out where to get money to payoff your debts. Click on the link and then Save the file on your desktop.
4. Put your plan into action
Complete your plan now by applying your available money determined above to pay off your debts.
Depending on whom you decide you want to pay first, put all of the extra money you have determined you have towards paying that debt off first plus the minimum payment amount. This will either be your smallest debt or the debt with the highest interest rate.
You should continue making minimum payments on your other debts.
Once you’ve paid off the first debt, combine the minimum payment from that debt with the extra amount you’ve allocated for repaying your debts and put it towards the debt with the next highest interest rate (or next smallest balance). Repeat this process until your debts have been completely repaid.
5. An example plan:
a. Determined what and who you owe:
b. Download and complete the Budget Worksheet to determine how much extra money you have to repay your debts. Click on the link and then Save the file on your desktop.
c. After completing the worksheet you determine that you can afford to pay an extra $250 each month to repay your debts. Let’s say that you decide you want to pay off the small balance first, you should then start with the Visa credit card account because it has the smallest balance.
Each month, make a payment of $310 ($250 plus the minimum payment of $60) until the debt has been repaid. Even though your minimum payment will decrease as you pay off the balance, continue sending $310.
Once you have repaid the Visa credit card you should then repay the Retail charge account, the next smallest debt balance. Your payment should be $560. This is because you should now apply the $310 you were paying to Visa credit card plus the $250 you were already paying to the Retail charge account.
d. Finally, when you have repaid the Retail charge account, use all $560 plus the $375 you were already paying to repay the Auto loan.
Remember things change over time so it is important to update your plan as necessary each month.