Your Guide to Escaping a Debt Trap
Life comes at you fast. It seems like only yesterday you received that great new credit card in the mail, and yet here you now sit, suffering the embarrassment of that very same card being declined because you maxed it out. How did this happen?
Well, it’s no coincidence that people talk about debt like it’s a trap. When you’re in debt up to your eyeballs, you might as well be sinking into quicksand in the middle of the jungle.
Still, that doesn’t mean that you should give up. Just like there’s always a way out of quicksand (probably like a sturdy vine? Or something?) there’s also a way to escape from your debt, no matter how firmly it has you in its grasp.
So grab your safari hats, keep your comically oversized butterfly nets at the ready, and check out these ten steps for escaping a dastardly debt trap.
Ask for help.
This is a good lesson for any situation, not just getting out of debt. Don’t convince yourself that you have to do this all on your own. Seek help from a local nonprofit or a credit counselor. Talk to your friends and family members who are good with money.
Heck, you can even to talk to them about helping you directly, either by lending you money or by cosigning for a low-interest loan or credit card.
Granted, you should only do this if you are confident you can hold up your end of the bargain. The last thing you want to do is end up with even more debt plus a ruined relationship.
Still, the first thing you should do when escaping a debt trap is to ask for help. Trust us.
Stop spending money you don’t have.
Asking for help might be step one, but it only beats out this step by a razor-thin margin. Before you can start getting out of debt, you first need to stop digging yourself even deeper.
Take a look at where you’ve spent money over the past couple months and figure out why you are spending beyond your means.
For some, this step will be easy, as the debt they’re carrying will have been from a one-time financial or medical emergency.
For others, this will mean making serious adjustments to their lifestyle. If you need to change your spending habits, then go ahead make them, pronto.
The sooner you do this, the earlier you’ll get out of debt.
Build (and stick to) a budget.
Good news, the actions you took in step two have already gotten you started on step three.
With a budget, you are going to stop letting your spending rule your life. Instead, you’ll make a plan for where your money is going to go.
Take your last three months of expenses and put it into an Excel document—or use one of these handy budgeting apps.
Separate your needs from your wants, or things like rent and car payments that you must pay versus things like movie tickets and late-night rideshares that you can cut out.
Prioritizing your needs over your wants is the key to a good budget, especially when you need to pay down excess debt. The more you can put towards savings and debt repayment, the better off you’ll be.
Make a debt repayment plan.
If you try and pay down your debt without a plan, you are dooming yourself to failure. So don’t do that.
Instead, make a plan that is both reasonable and that leaves you some wiggle room in case an unexpected bill emerges. (For more on that, see the next entry.)
No matter what kind of plan you make, it can’t rely on you paying only the minimum payments. Your budget needs to carve out room for extra funds.
People will swear by the Debt Avalanche method because it means paying off your highest interest debts first, but that can take a while.
The Debt Snowball, on the other hand, focuses on paying off your smallest debt first, which will give you early victories. For many folks, that’s encouragement they’ll sorely need.
Build an emergency fund.
Throwing all of your money towards debt repayment is all well and good, but it does come with a big downside: If you don’t have any money in savings, you’ll have to take on more debt any time a surprise expense comes your way.
The way to avoid that is to simultaneously build an emergency fund. While this might slow down your debt repayments somewhat, the financial security it’ll provide is well worth it.
When you make a budget, set aside money from each paycheck that goes right into a savings account. Heck, you can even get money in cash and put it in an envelope under your mattress.
These funds are for emergency expenses, so they need be easy to access, but you’ll also have to avoid using them for unnecessary purchases and splurges.
Your initial goal with an emergency fund should be $1,000. But really, the ideal size for an emergency fund is six months worth of living expenses.
Pay yourself first.
This is a simple but powerful financial lesson. Paying yourself first means putting your long-term financial needs before everything else.
In this case, you should figure out how much you want to put into savings and towards debt repayment every month. Once you have those numbers in mind, only then do you turn your attention towards building the rest of your budget.
It might sound a little silly, but you’d be surprised what can happen when you change up your financial priorities.
You might call this the financial equivalent of the baseball diamond from Field of Dreams: build these savings into your budget, and the money will come.
Be careful with debt consolidation.
One way to pay down your debt is to consolidate all your different debts into one single loan or credit card with a lower interest rate—or maybe with no interest at all.
But debt consolidation comes with dangers all its own, especially with credit cards. Using a 0% APR offer on a credit card to consolidate your debt can make your debt payments go farther, but what about all those old cards?
Closing those cards could actually hurt your credit score, but leaving them open invites a lot of temptation. If you’re not careful, you could end up racking up even more debt. That’s the last thing you need!
You need to be very, very careful, and keep those old credit cards in a place where you can’t access them very easily.
Increase your income.
The faster you can get out of debt, the more money you’ll save in interest and the sooner you’ll be able to put that extra money towards stuff that’s way more fun or productive or both.
But unless you want to start hunting local pigeons for food, there’s only so much room that you can carve out of your budget.
The only other option, then, is to increase your income! You can do this by taking on a second job or a fruitful side hustle.
The one thing you’ll want to watch out for is overwork and burnout, as that can lead you to make emotional splurge purchases.
Fix your credit score.
If you’ve spent years trapped in debt, the odds are good that your credit score is in the tank. (For reference: A credit score under 630 is considered “bad credit,” but even scores below 670 can seem too dodgy for traditional lenders.)
The amount of debt you owe makes up 30% of your FICO score, so getting out of debt should help your score immensely. But don’t get overconfident!
A better score will help you borrow money with better terms and at lower rates, so order a free copy of your credit report and see where exactly your score can be improved.
Here’s a tip: If your years in debt caused any late or missed payments, make sure you make all your payments on time moving forward. The only credit score component more vital than your amounts owed is your payment history.
You can also follow these tips to AVOID debt traps altogether.
Guess what? It turns out that spending beneath your means, maintaining a budget, and building your savings are all great ways to stay out of debt in the first place! Just follow the advice we’ve laid out in this article, and your financial future should be debt-trap free!