How to Get Out of Debt: 9 Tips
Updated March 2, 2020 . AmFam Team
If you’re struggling to pay off debt, you know it can be frustrating — and you’re not alone. The average American millennial earns an estimated 20% less than the average boomer did at the same age. With today’s high cost of living and skyrocketing student loans, millennials are having to take on large debt loads. And that makes it hard to pursue dreams like owning a home or saving for retirement.
What to Know About Debt
The average American has around $38,000 in personal debt, not counting home mortgages. For those ages 18 to 24, student loans are the biggest source of debt at 28%, followed by credit card balances. For older millennials (age 25-34), credit card balances are the top source of debt, followed by student loans at 16% and mortgages at 3%. So you have a lot of company if you’re looking to get debt-free. Here are nine tips to help you get started down the road to financial freedom.
1. Understand what you owe
The first step is figuring out how much debt you have. Take a look at all of your loan accounts – the mortgage, credit cards, student loans, car payments and any other outstanding debt. Once you have a good handle on your total debt, you can create a plan to pay it off.
2. Track spending
If you’re looking for ways to get your finances under control, start tracking what you spend. It’s the little purchases – like your daily vanilla latte – that add up over time. Make a journal for your finances and keep track of everything you spend, from big ticket items to little impulse buys. This is a crucial step in learning how to pay off debt.
3. Make budgets to track expenditures
Creating a budget is how you keep your financial dreams in clear focus. Thanks to the internet, you can take advantage of free budgeting apps to make it easier to stay on track when you’re on the go.
4. Avoid credit, avoid debt
Credit cards might be convenient, but they come with a cost. If you don’t pay your balance each month, you’re paying interest. And that means you’re not getting such a great bargain on that pair of shoes. Asking yourself if a purchase is worth taking a loan for, and paying more for, will help you identify unnecessary spending. When you’re in the process of paying off debt, try not to rack up new loans or you’ll just be back in the same hole.
5. Pay high-interest debt first
Paying the most you can to the highest interest loans you have — and the minimum to the lowest — removes your most expensive debts first. Once high-interest debt is paid off, tackle the next highest, and so on.
6. Refinance debt and transfer
The object is to pay as little interest as possible. Home refinancing can make a lot of sense while interest rates are low. With vehicles, looking for zero-percentage rate transfer opportunities can buy you time to pay down debt. But zero interest percentage periods are short lived, after which interest rates can jump.
7. Consolidate debt
If you’re dealing with a lot of debt, it can be o. And juggling bills on multiple accounts can be a lot to keep up with. One way to make it easier to manage is debt consolidation — rolling all of those individual loans into a single, lower-interest payment.
8. Stick to a list
Ever walk into a store with one thing to buy, and walk out with ten things (but not the one you came in for)? That’s a great way to drain your wallet fast. Before you go shopping, write out a list and keep it with you as you shop to avoid temptation. You might also find savings with coupons and special deals if you plan ahead.
9. Add income
Use your skills to freelance outside of your regular work hours to bring in extra income. You’ll be in good company — an estimated 57.3 million Americans are freelancing (Opens in a new tab) (36% of the total workforce). Or, if freelance isn’t your style, get a part-time job waiting tables or driving for a ride-share like Uber to make extra cash. You can also find things around the home you don’t use and sell them! Put that extra money toward paying off your balances more quickly.
These tips will get you on the right track to becoming debt-free. Need more help? Learn more about how to pay off credit card debt and how to save money.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
Can Student Loans Affect Buying a House?
Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.
Buying a house with defaulted student loans
If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.
Getting a home loan with student loan deferment
If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.
Should You Pay Off Student Loans Before Buying a House?
Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.
Signs You Should Pay Off Student Loans
When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.
Your debt-to-income ratio is too high
If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.
You’ve defaulted on your loans
Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.
You’re struggling to make payments
If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.
You haven’t saved for a down payment or emergency fund
Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.
