Getting Out of Debt: You Can Do It and Here’s How to Get Started

Most goals or resolutions that people set for themselves are neglected within a few weeks. It’s likely that this happens because people set far-reaching goals for themselves and then lose momentum when they don’t see results right away. A perfect example of this is the financial goal that many people set for themselves: getting out of debt.

In 2017, the average American household carried

  • $16,883 in credit card debt
  • 29,539 in auto loan debt
  • $50,626 in student loan debt
  • $182,421 in mortgage debt

Additionally, of those American who are carrying a credit card balance, 53% are only making minimum monthly payments and they are paying almost $1,300 in credit card interest each year.

When you’re working towards getting out of debt, stats like that can seem overwhelming at first. But when you break down a huge goal into smaller steps, you’ll see quicker results and stay motivated towards reaching your goal.

Benefits of Getting Out of Debt

Many people question whether they should be putting their hard earned money towards growing their savings or paying down debt. But when you break down the dollars and cents, paying down debt is the wiser decision.  In simplest terms, the interest you pay on outstanding debt each month is much greater than the interest you would earn with your money sitting in a savings account.

In addition to pocketing all the money you’ve been paying towards interest charges, there are other benefits to paying down debt:

  • Lowering the amount of outstanding debt you hold improves your credit score, which in turn improves the options available to you when buying a new home or car or obtaining insurance
  • Less money spent on credit card bills and loan payment is more money available to grow your retirement savings, save for a downpayment on a new home, or build a college fund for your children.

getting out of debt

When you’re ready to tackle your debt head-on, instead of saying “I’m Getting Rid of All My Debt!”, break it down into three manageable steps:

  1. I’ll focus on my high-interest debt first
  2. I’ll commit to paying more than the minimum
  3. I’ll investigate lower rate options

Step #1: Find Your Highest Interest Rates

Your initial reaction may be to start with your smallest debt balance because you can pay it off faster.  But targeting the debt that charges the highest interest rate, usually credit cards or personal loans, means you’ll be paying less money each month.  This is especially true if you can pay off any debt that charges compound interest.

Once you’ve found the loan or credit card with the highest interest rate, take whatever extra money you have available each month and put it towards this payment. (But keep making payments on your other loans or credit cards too!)

Once you achieve zero balance, move on to your debt with the next highest interest and repeat the process. While it may take a little longer to pay off high-interest debt instead of small balance debt, you’ll be saving yourself a lot of money in the long run.

You should also survey your outstanding debt and divide it into categories of good debt and bad debt.  Good debt is represented by loans or investments that will help you generate future income or increase your net worth. Good debt is your student loan, small business loan, or mortgage. Bad debt, on the other hand, does not increase your net worth.  In fact, bad debt is represented by items that depreciate, or lose value.  This includes an auto loan, credit card debt, or a personal loan. If your goal is getting out of debt, focus on your bad debt first.

Step #2: Pay More Than The Minimum

This step goes hand-in-hand with Step #1.  The higher your balance, the more interest you’ll be charged.  So if you can bump up your monthly payments, even by as little as $10, and pay more than just the bare minimum, you’ll be charged less interest each month.

In the fight towards getting out of debt, making more than the minimum payment can be your best weapon. Not only will you be paying less in interest charges, you’ll also see your debt disappear a lot faster. Focus on small ways you can find additional money each month to put towards your outstanding debt.

  • Take a look at your monthly budget and identify just a few places that you can cut out $10 (or $15, or $20) each month to put towards your credit card, student loan, or mortgage payments.
  • Use your tax return to make one additional loan or credit card payment each year.
  • Once you’ve successfully paid off a loan, keep it going! Don’t be tempted to spend that extra money each month. Instead, use it towards paying down the next debt item on your list.

Step #3: Research Zero Interest Options

If you’re really struggling with getting out of credit card debt, you may want to research options for a balance transfer.  A balance transfer allows you to take the debt from a high-interest rate credit card and move it onto a credit card with a much lower interest rate.

A balance transfer can be really helpful in kick-starting your goal of getting rid of debt, but there are a few things to watch out for.

  • First, there may be a balance transfer fee. A typical fee is 3% of your balance. Make sure the savings from a lower interest rate offset any fees.
  • Second, find out if there is a timeframe for transferring your balance.  Some cards require that it be done in the first 30-60 days of opening the card.
  • Finally, many balance transfer cards feature an introductory interest rate of 0%, but it’s just that, introductory.  Your interest rate may revert to the card’s standard rate after 6-18 months.

Once you’ve reached your goal of getting out of debt, don’t fall back into old habits!  Your hard work will be for nothing if you simply start a new cycle of growing bad debt.

photo credit:


Liz Oliver
Liz Oliver

Liz Oliver is the Member & Loan Services Officer at Lancaster Red Rose Credit Union. She’s been a member of the LRRCU team since 2007.