Climbing Out of Debt

Debt is like a sinkhole; it keeps getting deeper unless you do something about it. It is easy to get into debt; it’s much harder to get out of it. But it can be done. It will take time and commitment, but taking action is far less stressful than watching the debts grow. Follow the steps below and then use the Debt Recovery worksheet to get started.

• Stop getting any further in debt. For example, if you are in debt because you charge more on your credit cards than you can pay off each month, then stop using the cards until the debt is paid.
• Determine who you owe. Do you owe many businesses or just one or two?
• Read the fine print on credit card invoices or other loan agreements. Is the total amount due? What will happen if you miss or are late with a payment? Could an item be repossessed?
• If you are in debt to only a few businesses, call them and try to negotiate for smaller payments—at least for a while. Call them before you miss a payment. This may be a difficult step but it’s less embarrassing than receiving telephone calls from creditors (possibly while you are at work) demanding payment.
• If you owe many businesses, it may be time for outside help. Consider working with a nonprofit debt counseling service such as the National Foundation for Credit Counseling. They can work with you and your creditors to set up a repayment plan.
• Review your budget, and look for ways to cut expenses. For example, can you carpool to work and share expenses with a coworker? Can you bring lunches instead of eating out?
• Try to find ways to increase income. Are there other family members who could contribute financially? Can you work extra hours at your job? Is a second, part-time job an option? Do you own things you no longer use and could sell?
• Try to consolidate your debt. It’s more effective to pay a larger amount on one loan than it is to pay small amounts on several loans. If you owe money on several credit cards, try to move the balances to the card that charges the lowest interest rate. Check with your bank or credit union about available consolidation loan options. If you do consolidate your debt, it’s important to avoid taking on any new loans.
• If you don’t consolidate your debts, it’s a good idea to pay just the minimum payment on all except one — and pay all extra dollars you can on that one, until it is paid off. Then repeat the process with the next debt you want to pay off. Which bill should you choose to pay extra on? Pay off either the lowest balance debt or the highest interest rate debt first. The highest interest rate order may help you to pay off your debt a bit sooner than the lowest balance method. But there is great satisfaction in seeing a number of bills paid off quickly, so you might be more motivated to keep going. Both methods will get you out of debt — so pick one that makes sense to you.
• Above all, do not ignore bills and past-due notices. A poor credit record will follow you for years. It could even hurt your chances of getting a job.