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A Three-step Plan for Getting Out of Debt

Breaking the debt cycle is the most important step toward freedom from consumer debt. This is a proven method many have used to get into the habit of living without debt.

1. Stop spending (on credit)

The first step to getting out of debt is to stop spending on credit.1 Try going back to cash or debit for 30 days so you can develop a habit of affording your regular living expenses without relying on credit.

  • Put your credit cards away.
  • Disconnect credit cards from your online shopping apps and your digital wallet.
  • Try to go 30 days without using your credit cards at all.

2. Build a plan

When debt feels overwhelming, it can be difficult to even know where to start. Getting organized and setting up a straight-forward strategy will give you the clarity and confidence to begin. Building a step-by-step plan can help you see the finish line.

  • Gather your account balances, minimum payments, and interest rates.
  • Input each one in a snowball debt elimination calculator.
  • Create a checklist from your plan so you can mark your progress.
  • If you need help building a plan, consider credit counseling.

3. Make your payments

While you are acclimating to life without credit cards, you may need to make only minimum payments at first. Direction and momentum are what matter. Keeping rule number one (no spending on credit) is priority—even if that means making smaller payments on your cards. Your first win can be to recognize that while balances may not be reducing quickly, at least they will not be rising.

  • Make at least the minimum payments.
  • When you have enough in reserve, increase your payments.
  • Once your first (smallest) account is paid off, add that payment amount to the second debt on your list.

You can also contact creditors directly and ask for lower interest rates, removal of late fees, and/or lower payments. Not all banks will concede, but some can be cooperative with enough persistence and may offer periods of lower interest, or other temporary measures to give you some relief.

Once you have broken the cycle, paid off all consumer debt, and your credit card balance is zero, if you want to use your card, pay it off every three days instead of every 30. This can reduce your risk of going into debt again.

Dealing with extreme debt

If you have a high consumer debt level, where monthly payments exceed 36–40% of your income, or extremely high finance charges are impeding progress, refinancing or consolidating your debt may help.

  1. First divide the total of your minimum monthly debt payments by your gross monthly income.
  2. If your result does not exceed 36% you are still within the general range of recommended debt-to-income ratios and should be able to afford your payments.
  3. If you are allocating 36% or more of your gross income to debt, refinancing or consolidating your debt to lower your monthly payments can help.
1 If you are trying to pay off consumer debt, removing access to credit means using cash or debit for regular spending, such as gas, groceries, and eating out. This is not a recommendation to close credit accounts, or travel or live long-term without credit. A healthy credit score and the ability to borrow is necessary to operate financially, greatly facilitating the ability to buy a house, pay for higher education, and purchase a car. Keeping accounts open and in good standing helps to establish longevity when it comes to credit history, which can be damaged if you close your oldest accounts.