Key Takeaways

  • Paying off your debt is the first step toward financial empowerment.
  • Consider whether you can negotiate or consolidate some of your debt.
  • Think about how your spending habits have contributed to your debt load.

Feeling overwhelmed by debt isn’t a good feeling, and it’s not any easier when you’re also trying to make ends meet on a limited income.

Unfortunately, the temptation for many of us is to use high-interest debt to get by. You might tell yourself it’s just a temporary life raft, but more often than not you’ll be drowning in even more debt – and hurting your chances to accumulate significant savings or investments.

Make no mistake: the best path to financial empowerment is to eliminate your high-interest debt as soon as you can, regardless of your current income levels.

Here’s a quick guide for how to tackle your debt starting today.

Find out how much you’re in debt

If you’re not absolutely certain about your debt level, it’s time to for a reality check. It may not be easy, but it’s your first step toward fixing the problem. Sit down with all of your bills – credit cards, car loans, school loans, personal loans – and add up the total amount of your debt.

Some experts suggest taking your debt total and dividing it by your income to calculate your debt ratio. For example, if you earn $50,000 a year and have debt of $25,000, your debt ratio would be 0.5. (On one scale, anything over 0.35 is “poor”). However, keep in mind this can be a double-edged proposition: while you get a good snapshot of how unhealthy your debt level is, it can be tempting to not treat your debt seriously if your ratio is at a less troublesome level.

Prioritize your payment plan

With a limited income, you’ll need to choose how much you pay each creditor. It might make sense to focus on keeping current on your secured debt – amounts you owe that are backed by property, like a car loan or a mortgage. Also, consider giving high priority to debts related to necessities like utilities, as well as debts that you can’t discharge, like student loans and unpaid federal taxes.

As for credit card debt, there are two ways to do it. The first is to target the card with the highest interest rate, while paying the minimum on the rest of your cards. When you’ve whittled that card down to zero, move on to the card with the next highest rate. If your credit card debt amounts are roughly the same, this strategy will allow you to pay the least amount in finance charges.

The other philosophy is the “snowball” approach: You budget a total monthly amount toward credit card bills, paying the minimum on larger balances and working to pay off the smallest balance first. You might end up paying more in interest, but you might gain a psychological boost from completely erasing debt one card at a time.

Negotiate for a lower rate or balance – it’s worth a try

You know how much you owe, but why not see if you can get your creditors to lower your interest rate and even total balance with a quick phone call? You can either do this yourself or with the help of a credit-counseling service like National Debt Relief. These types of services will charge you a fee, but you’ll end up paying less than what you owed originally, so you’ll be able to save money.

Remember that credit card companies have an incentive to have you keep paying your payments on your account. They might help you out, and all they can say is no.

Consolidate, if it saves you money

Moving multiple credit-card and loan bills into one monthly payment can be a compelling way to streamline or reduce your debt payments. Some credit cards offer zero-percent teaser rates for a limited time to get you to transfer your balance. You’ll typically pay a transfer fee, but this can be a good way to extend your balances due by a certain amount of time while you try to pay off your principal balance. But remember, if you don’t pay off the entire outstanding balance by the time the teaser rate expires, you may owe at a much higher rate, sometimes above 20 percent.

Another option is turning to a debt consolidation service. In this scenario, a company pays off all of your debts, and you pay them back in one, neat, tidy bill. Often, you will owe the debt consolidator at a lower interest rate, but that’s not always the case. In addition, even if your monthly payment is less than what you were paying for all of your previous bills combined, make sure it’s not because you’ve lengthened the total payment period. This simply means you’ve traded off paying less for more total payment periods, which increases the amount you ultimately pay back.

One more warning: debt consolidation loans are almost always secured by a possession like your car or home. If you start missing these payments, you’re at serious risk for repossession.

Read more in our debt consolidation post.

Avoid taking on additional debt!

Is it possible that you amassed a load of debt because you tend to rely credit cards too often? Here’s where it might make sense to study some of your spending habits, since it’ll be twice as hard to pay off revolving card balances while you’re simultaneously running up more debt on them. It’s always a good idea to set up a budget. And see how long you can sustain a moratorium on future credit-card spending by using cash, a debit card or a prepaid credit card.

If part of your weakness has been the use of a rewards credit card, try to recognize the downsides of such cards – particularly that they entice you to be less vigilant about spending. As far as the credit card companies are concerned, that’s the whole idea.

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Once you’ve become debt-free, stay vigilant to remain that way. Pay off your credit card bill in full every month if you can. If you can’t, put the card away until you’ve cut your debt to zero. Consumer debt can be managed, but a little bit can unfortunately go a long way.