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Five Steps to Get Out of Debt

Step #1: Get your budget in order.

To get out of debt, you first need to have your budget in order.

There are two main reasons you need a budget first and foremost before putting together a plan to get out of debt:

  • Provides a plan to spend money to avoid using credit
  • Helps you find extra money to put towards your debt

Use the Building a Budget guide to get started. Your goal is make sure your needs are met and find ways to reduce expenses to increase how much you can put towards your debt.

Step #2: Stop creating more debt.

Easier said than done, but that’s why building your budget is the first step. Once you have a budget, you need to stick to it to avoid using credit for purchases. You also need to understand your triggers and barriers to success.

Triggers

If you know you’ll still be tempted, you need to know your triggers. Ask yourself:

  • When do you feel tempted to buy something you can’t afford (and put it on credit)?
  • What do you tell yourself when you’re feeling tempted?
  • Are you feeling sad, mad, disappointed, frustrated, etc.?

Everyone has different triggers to spend money. Common ones include retail therapy, boredom, leisure, and justification. While it can be difficult, it’s important to recognize what leads you to spend money you don’t have.

Barriers

Barriers are things that keep us from doing what we want and know we need to do. They get in the way of changing behaviors and being successful. Barriers can be difficult to identify and depending on the barrier, difficult or easy to fix.

For example, if you’re trying to reduce your eating out spending, you’d probably make a goal to cook more at home. However, the physical act of preparing a meal can be enough to keep you from doing so and instead you find yourself in the drive-thru.

To figure out your barriers, think of an action you want to do. For example, I only want to go to the grocery store once a week. Then ask yourself “why” you don’t do this to get down to the barrier that is stopping you from accomplishing this action.

Step #3: Make your list.

To develop your get out of debt plan, you need to know where you stand with your debt. This requires gathering the information and putting together your list of what you owe.

Use the Know What You Owe worksheet to put together your list. You’ll record the Company/Creditor, the Current Balance, the Interest Rate, the Minimum Monthly Payment, and the Payment Due Date.

Step #4: Make your plan and set goals.

When you make your plan, you need to first determine how much extra money you can afford to put towards your debt each month (above the minimum payments). This is done by looking at your budget. Ideally, you’d have found ways to trim your budget so that you have extra money left to put towards your debt.

Next, you need to develop your plan. Some of the plans can work in conjunction with another. For example, you may want to refinance your loans or consolidate your revolving debt before moving forward with the stack or snowball methods. Evaluate each of the options and pick the ones that work best for you.

Refinance

Refinancing involves replacing a loan with a new loan with ideally a lower interest rate and/or a lower monthly payment. While not technically a “payment plan”, refinancing debt is a great option if you have debt with a really high interest rate.

Consolidate

Consolidation means taking out one larger loan and using that loan to pay off your other loans. You’re replacing multiple loans with one “super” loan. The goal is to reduce your monthly payments and possibly the interest rate and time to pay off your loans.

Stack Method

The stack method is the one that typically costs the least over time. To help with your interest rates, you may want to refinance or negotiate for a lower rate.

Example: you can afford to pay an additional $100 per month

Debts Balance Interest Rate Monthly Min Payment
Credit Card A $1,000 17.9% $15 + $100
Credit Card B $500 12.25% $30 + $115
Auto Loan $17,500 6.0% $350 + $145
Student Loan $23,000 5.2% $250 + $495
  • Consider refinancing or negotiating for lower rates on your debts with the highest rates
  • Order your debts by interest rate (highest to lowest)
  • Pay the minimums on all your debts
  • Apply the extra money from your budget to the debt with the highest rate of interest
  • Continue until you pay off the debt
  • Once the debt is paid off, apply that payment to the debt with the next highest interest rate
  • Continue until all debts are paid off
Snowball Method

The snowball method involves paying off your debt in order of balance (lowest to highest). Many people prefer this method as you ideally see a quick win as you pay off your first debt quicker.

Example: you can afford to pay an additional $100 per month

Debts Balance Interest Rate Monthly Min Payment
Credit Card B $500 12.25% $30 + $100
Credit Card A $500 17.9% $15 + $115
Auto Loan $17,500 6.0% $350 + $145
Student Loan $23,000 5.2% $250 + $495
  • Consider consolidating revolving debt, refinancing, or negotiating for lower rates
  • Order your debts by balance owed (lowest to highest)
  • Pay the minimums on all your debts
  • Apply the extra money from your budget to the debt with the lowest balance
  • Continue until you pay off the debt
  • Once the debt is paid off, apply that payment to the debt with the next lowest balance
  • Continue until all debts are paid off
Set Goals

Once you’ve picked the method to pay off debt, set goals for yourself. When do you want to have your first debt paid off? When do you want to pay down your debt by 50%? Think about the goals that mean the most and write them down on your plan.

Step #5: Put in the work.

You have your budget; you have your list; you have your plan. Now it’s time to put in the work to reach your goal of paying down your debt.

Keys to reaching your goal:

  • Know and recognize triggers and try to find alternative ways to cope that don’t involve spending money or using credit
  • Display your plan where you will see it every day – maybe on your phone, your refrigerator, your desk, etc.
  • Review your budget regularly and make changes as needed
  • Continually look for ways to reduce expenses or increase income
  • Dedicate any “bonus” money (tax refunds, bonuses, etc.) to paying down the debt you are currently focused on
  • Find someone to hold you accountable to your goals
  • Celebrate milestones

Know What You Owe

To better understand where you stand with regards to debt, you need to know what you owe. Gather your current debt statements and input the information in the Know What You Owe worksheet.

For more information, read the Five Steps to Getting Out of Debt guide.

Stack Method

Use the Stack Method Worksheet to develop a plan to pay off debt. The stack method is the one that typically costs the least over time.

 

  • Consider refinancing or negotiating for lower rates on your debts with the highest rates
  • Order your debts by interest rate (highest to lowest)
  • Pay the minimums on all your debts
  • Apply the extra money from your budget to the debt with the highest rate of interest
  • Continue until you pay off the debt
  • Once the debt is paid off, apply that payment to the debt with the next highest interest rate
  • Continue until all debts are paid off

For more information, read the Five Steps to Getting Out of Debt guide.

Snowball Method

Use the Snowball Method Worksheet to develop a plan to pay off debt. The snowball method involves paying off your debt in order of balance (lowest to highest). Many people prefer this method as you ideally see a quick win as you pay off your first debt quicker.

 

  • Consider consolidating revolving debt, refinancing, or negotiating for lower rates
  • Order your debts by balance owed (lowest to highest)
  • Pay the minimums on all your debts
  • Apply the extra money from your budget to the debt with the lowest balance
  • Continue until you pay off the debt
  • Once the debt is paid off, apply that payment to the debt with the next lowest balance
  • Continue until all debts are paid off

For more information, read the Five Steps to Getting Out of Debt guide.