Get the Marcus App

Easy mobile access

How to Get Out of Debt: A Quick Guide

What we’ll cover:

divider

Carrying a credit card balance isn’t unusual, in fact: a 2019 report by the Federal Reserve showed that 53 percent of Americans reported carrying a credit card balance at least some of the time during the prior year. In the US, the total outstanding amount of consumer revolving debt reached 1.09 trillion in January 2020.

And the share of credit card balances transitioning into 90+ day delinquency has been rising since 2017.

But just because it’s relatively common to carry balances doesn’t mean paying them down – let alone tracking each one – is simple. But we have some good news for you. It doesn’t have to stay that way.

Here are some strategies that may help you pay off debt and even make the process more straightforward.

Create a plan to get out of debt

Before you start trying to pay down debt, there are a few steps you have to take. The first step, a mindset shift, is easier said than done. It may sound cheesy, but try telling yourself, “it is possible to pay down my debt.” Because it is!

Once you’ve figured out how much money you need to pay down, you can draft a monthly budget.

Second, gather all of your information. Pull together your outstanding balances and interest rates on each account so you know where you stand and which account is charging you the most in interest. This should include credit card debt, student loan debt, auto loan debt and even ones that don’t show up on your credit report, like those from family members. Here’s an example of what this might look like:

Interest Rate

Outstanding Balance

Minimum Monthly Payment

Lender ABC

16%

$5,000

$200

Loan 123

6%

$18,000

$347.99

Set goals to pay off your debts within a specific timeframe, acknowledge your spending habits and determine if you need to adjust your habits to achieve your goals. 

Now, you can craft your budget.

Set a budget to see how much money you have each month to pay off debt 

Once you’ve figured out how much money you need to pay down, you can draft a monthly budget. Figure out how much you spend on daily and monthly expenses and what percentage of your income goes toward those expenses. This way, you’ll be able to see how much money you have left over at the end of the month that you could put toward paying down your debt.

A common misconception during this process is “I'll have more money tomorrow - and then I'll pay the debt."

In reality, you can’t spend the same dollar twice. If you need to put money toward paying down a debt, that’s cash you can’t spend on something else. Without making a budget, you may not notice the money in your account has already been allocated elsewhere. Spending on other bills, even necessities, means the money will not be there to cover the payment you planned to make at the end of the month.

Another common mistake is not tracking your budget diligently and just following a mindset of "I'll spend less this month than last."

Sure it's easy to create and stick to a budget for recurring costs - like rent, utilities and gas. But soft costs - from small home repairs to meals with friends - are harder to account for, since they aren’t always planned. The benefits of budgeting is that it will help you figure out the average of what you spend each month so you can see where adjustments need to be made.

Cutting back on your spending to create room for paying off debt

After assessing your budget, if you find you don’t have a lot left over, consider cutting back where you can to save money and allocate more towards paying off debt faster. Maybe it’s a preparing more meals at home or cutting a fitness membership. If that’s not enough, consider selling some of your unused or unwanted items to boost your income.

Your credit and debit card statements can reveal a lot about which portion of your income goes to needs and which portion goes to wants. Download your statements and categorize each expense. You shouldn’t feel guilty for indulging every now and then, but to pay off debt aggressively you may have to aggressively cut back.  

Cutting back on expenses and keeping your balances low can positively affect you in more ways than one. Reducing your balances on credit cards and the amount of credit you’re using month-to-month could improve your credit score. The ratio of the amount of credit you’re using to how much revolving credit you have available from lenders is your “credit utilization ratio”. The lower credit your utilization ratio – the better.

Tip: Earn extra money

  • Another way to find extra money to contribute to paying down your debt is by actually earning more money. You might consider trying to negotiate your salary or looking for a higher-paying job, if you’re in the position to do so. 
  • Beyond trying to increase your earnings, make sure your money is working for you. If you don’t have your savings stored in a high-yield savings account, you could be missing out on money you could’ve earned in interest.

Now that you have your budget and plan, you can start paying down your debt with a few of the methods listed below.

Methods for Paying Down Debt:

Debt Snowball Method

Pay off small balances first.

With the snowball method, you pay off the smallest debts first. Say you have a balance of $50 on one card, $1,500 on another and $4,500 on a third; in this case, you’d start by paying off the $50 balance while making the minimum payments on the other cards. After you’ve paid off the $50 balance, move on to pay off the $1,500 debt, and so on.

This method is less about math and more about behavior modification. The idea is that by seeing results early on, you’ll be more motivated to continue paying down debt.

A potential downside to this method is that if your highest balances are on your highest-interest cards you may not be making a big dent in reducing your total debt. If this is the case, you may want to consider this next method.

Debt Avalanche Method

Pay off higher-interest accounts first.

The key here will be to pay down the cards or accounts that have the highest interest rate first. Then, once those accounts are paid off, move to the accounts with the next highest interest and continue until all the debt is paid off. Along the way, be sure to make the minimum payments on all your other cards.

The benefit to this approach is that it more effectively minimizes the amount you pay in interest. The lower the interest rate is on a debt, the more you are paying towards the principal balance instead of the fee you’re paying to borrow the money.

How to consolidate your current debt: Debt management options

Use a balance transfer card

A balance transfer allows you to transfer your credit card debt from one or more cards to a new credit card, sometimes for a fee. If you have debt on a credit card with a high interest rate, you could consider a balance transfer. Balance transfers may be advantageous because they could allow you to pay a low promotional interest rate for a limited amount of time.

The only catch is that if you fail to pay back your balance before the promotional period ends, the interest rate could go up by quite a bit. So, if you do decide to go this route, be sure to stay on top of your payments and mark on your calendar when the promotional period ends. If you don’t think you can pay back all your debt before the promotional period ends, it may not be worth it to use this method.

Since your goal is to get out of debt, you do your research to ensure you fully understand the promotion.

Two questions to ask:

  1. What is the balance transfer fee? Most balance transfer cards require that you pay a balance transfer fee between 3 and 5% of the total amount that you’re moving to the new account.
  2. How long does the promotional period last? If you cannot repay your debt within the promotional period, your interest rate could increase, leaving you right back where you started: paying a high interest rate.

Don’t be afraid to call your lenders to negotiate a lower balance or interest rate. You may be surprised with what they can offer you!

Negotiating a debt settlement

Debt settlement is the process of negotiating with your creditors to pay back only part of your debt. In exchange for a partial payment, your creditors agree to forgive the remainder of your debt. Sounds pretty good, right? Not really. Debt settlement could result in a bad mark on your credit score that’ll last for seven to 10 years. 

Debt settlement should be considered more of a last resort. If, back at step one, you totaled up all your debt and the number you came up with seemed absolutely out of reach, then you could consider looking into your debt settlement options.

Consider a debt consolidation loan

If you find juggling numerous accounts a pain to keep track of, taking out a personal loan for debt consolidation could be a good option.

A debt consolidation loan is used to combine multiple debts into a single, larger debt. It could have more favorable terms, and instead of having numerous payments for those debts, you would have just one recurring monthly payment. When you’re trying to get out of debt, you want to make the most of every dollar. If you qualify for a lower interest rate, consolidating your debt could save you money that you can put toward paying down the principal on your debt.

Stick to your goal

Paying off debt fast can be hard, but just deciding you want to be rid of it is a step closer to your goal. When it comes down to it, the key to becoming debt-free is just keeping your eye on the objective.

If you’re not seeing results, it’s okay to adjust your initial strategies. Once you’ve hit your goal, you’ll know you’ve accomplished something great.

Some benefits of debt-free living.

logo

Learn how you can simplify your debt with a debt consolidation loan.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.