12 Things to Do When You’re Deep in Debt

Reducing debt often means changing your spending habits.

There are a lot of challenges in the world right now, but it is possible to reduce your debt, even during shaky economic times and a pandemic. According to the Federal Reserve Bank of New York, total household debt decreased by $34 billion in the second quarter of 2020, and credit card balances fell by $76 billion.

Some of the reduced debt, of course, is simply due to cardholders spending less — or credit cards limiting how much people can borrow. But it’s also likely due to more people utilizing money-management and debt-killing strategies. So if you’re looking for ways to reduce your debt, we have some tried-and-true strategies for bringing it down.

Set up an automatic savings account.

If you never have money to draw upon for purchases that you know are coming, like holiday gifts, birthday presents and one-offs like paying for your kid’s school photos, you’ll probably find yourself relying more on your credit cards. Doing that, of course, can put you further in debt. So one of the first things you should do, if you want to get out of debt, is get in the habit of saving money.

If you set it up through your bank, so that the moment a direct deposit hits your checking account, some of it is diverted to a savings account, a few months from now you’ll have a small pile of your own money that you can raid, instead of turning to a credit card.

Create an emergency fund.

Unexpected events, like a car breakdown, can really destroy your finances. Therefore, you should save for emergencies, even when you’re buried in debt, says Sophie Raseman, head of financial solutions for Brightside, an employer-sponsored financial care benefit for employees.

“This habit is key because it’s what you’ll build on to prevent yourself from getting into more debt in the future,” she says.

After all, why did you go into debt in the first place? You didn’t have enough in savings, and so you relied too much on credit cards and taking out loans.

Pay off the debt with the higher interest first.

This is known as the avalanche method of paying off debt. Let’s say you have three credit card accounts, all of them with a lot of revolving debt. With the avalanche debt-killing strategy, you would take two of those credit card accounts and make the monthly minimum payments on them. The third card, the one with the highest interest rate, you would pay off with as much money as feasibly possible (without hurting your ability to pay bills and buy food and so on).

Once that third card was paid off, you’d then take the money you were spending on the third card, and you’d put that money toward the next card with the highest interest rate. After that’s paid off, you’d put the money toward the last card.

Or — pay off smaller debts first.

The avalanche method makes more sense mathematically, but it can take a while to see results. Many financial experts instead recommend focusing on the credit card with the smallest amount of revolving debt. (You still, of course, make minimum payments on the rest of your credit cards.)

Once the card with the smallest balance has been paid off, then you focus on the credit card with the next smallest amount.

“There is some evidence that the snowball method, where you prioritize by smallest balance first, helps some people because it creates the potential for quick wins that help maintain momentum,” Raseman says. “It matters less which method you pick than that you pick something and stick to it.”

Pay your bills on time.

When you’re deep in debt and struggling to get out, it’s so easy to fall into a habit of making payments when you can, rather than when they are due.

Better late than never, of course, but late fees can do a lot of damage. If you’re past the due date with just about everything, that might mean you’re late when paying your mortgage, your car payment, your utility bills, phone bills, student loans and, of course, credit cards.

And late fees really can add up. Assuming you are paying several of your monthly bills late, and you can manage to pay them all on time for a month, you’d probably have quite a bit of extra money to go toward debt, savings or day-to-day expenses.

Use cash as much as possible.

Paying in cash isn’t practical for a lot of expenditures. But with some purchases, using cash can be a practical and smart way to manage your money, says Scarlett McCarthy, the founder for LiterallyBroke.com, a personal finance platform dedicated to artists and creatives.

“My No. 1 tip for people paying off a lot of high-interest debt is to adopt a cash budget for groceries and fun money,” McCarthy says. “Using cash forced me to realize how seemingly small purchases add up. I had to become much more intentional with my spending and plan ahead for things like birthdays and events.”

Transfer your credit card balance.

A lot of credit cards will offer 0% interest on balance transfers deals, for periods of 12 to 18 months, as a way to attract new customers.

It can be a useful way to kill off debt — you put, say, $3,000 onto a credit card that charges no interest for a year or so, and you spend that year or so paying it off. But there are a lot caveats that go with this strategy.

For starters, you can generally only get credit cards with 0% interest on balance transfers if you have stellar credit. You also want to pay attention to the balance transfer fee, which is usually 3% to 5% of your balance. Also, if you buy a bunch of things on the old credit card and don’t pay down the debt you’ve transferred to the new credit card, you could soon wind up pretty much doubling your debt.

Create a bare-bones budget.

This is as much fun as it sounds. Still, it should be effective.

“One key strategy is to cut back to a bare-bones budget, which frees up more funds to devote to paying down debt. That means a budget focused on just the basics — housing, food, utilities, transportation and bills. Eliminate all discretionary spending, such as entertainment, travel, clothing and gifts,” says Amy Maliga, a financial educator with Phoenix-based Take Charge America, a nonprofit financial counseling agency.

And within those basics, Maliga advises that you are as “economical as possible.”

“Prepare all meals at home, keep a close eye on when and how you use water and electricity, and try to negotiate lower rates for essential services such as insurance. If you start feeling discouraged, remember, your bare-bones lifestyle won’t last forever,” she says.

Stop creating new debt.

This strategy may require dramatic changes. “You can’t dig out of debt if you continue to rely on credit cards for expenses. Stop accruing new debt and focus on a cash-only lifestyle. Lock up your credit cards or hand them over to a trusted friend or family member to hold on to them for you,” Maliga advises.

“Let them know your goal is to get out of debt and ask for their encouragement and support. Sharing your goal with someone who can hold you accountable is a powerful tool to make changes that stick,” she says.

Talk to your credit card issuers.

A candid phone call could pay off. “Many credit card companies offer short-term hardship programs that will temporarily lower your interest rate to allow more of your monthly payment to go toward the principal. This will help you make progress quickly and motivate you to keep going,” Maliga says.

That said, understand that the moment you start talking to your credit card company about how you’re struggling to pay off the debt you owe, you may see your credit limit reduced — or you might be denied any more purchases.

Refinance debt.

Refinancing debt can be a formidable strategy to reducing what you owe. “While it can take time to receive approval, refinancing can help lower your monthly payments long term,” says Andrea Williams, a Northwestern Mutual wealth management advisor based in Chicago.

“Any extra money you save from refinancing can be put toward repaying high-priority debts — i.e., house or car payments, student loans,” she says.

Of course, keep in mind that with some types of refinancing, you might be looking at extra costs or extending a loan so that the loan is more expensive in the long run.

Prioritize the debt you need to pay.

If you’re really struggling and can’t pay off each debt every month, Williams says it’s important to prioritize what entities you’re paying.

“Prioritize debts secured by a house or car, necessities like utilities and debts that can’t be discharged, including student loans and unpaid federal taxes. Then focus on unsecured debt, like credit cards,” Williams says.

The credit card companies may not love hearing that, but if you have to choose between making payments, your home and car should come before your credit card debt.

Bring down debt using these strategies:

— Set up an automatic savings account.

— Create an emergency fund.

— Pay off the debt with the higher interest first.

— Or — pay off smaller debts first.

— Pay your bills on time.

— Use cash as much as possible.

— Transfer your credit card balance.

— Create a bare bones budget.

— Stop creating new debt.

— Talk to your credit card issuers.

— Refinance debt.

— Prioritize the debt you need to pay.

More from U.S. News

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12 Things to Do When You’re Deep in Debt originally appeared on usnews.com

Update 09/16/20: This story was published at an earlier date and has been updated with new information.

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