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Illustration of a chain breaking in half
Illustration of a chain breaking in half
Illustration of a chain breaking in half

Originally published March 7, 2016.
Updated May 6, 2019.

Tips for shedding costly debt.

If you're in debt, you're among friends.

Total U.S. household debt reached a new high at the end of 2018 — $13.5 trillion, according to the Federal Reserve. About $4 trillion of that was non-housing related, meaning auto loans, student loans, and credit card balances.

Some debt is considered good. School loans or a mortgage, on one hand, represent investments in yourself or in a home likely to increase in value. Bad debt, on the other hand, is used to buy things that quickly lose value, don't appreciate in value, or carry high interest rates.

Here are some ways to help you shed debt you don't want — and to keep it off.

Choose a method to pay down debt.

There are different methods to shed debt. You could start with the smallest balances and move on to larger balances. Or pay off debts with the higher interest rates first and lower interest rates later. Or combine the two strategies. Consider these factors:

  • Paying off smaller debts first nets quicker "wins" to motivate you to keep going. Paying off an entire credit card, for example, is also likely to boost your credit score.
  • Paying off debts with higher interest rates usually saves more money in the long run.
  • A hybrid method can help you start with an early win, providing motivation to then attack a high-cost debt.

Earn extra cash.

If you can get a promotion, start a higher-paying job, or land a second job, then great! But there are other ways to boost income or cut expenses, leaving more cash for you to pay off debt, including:

  • Sell a large item.
  • Take the bus or carpool, saving on gas or letting you live car-free.
  • Hold a garage sale.
  • Get a roommate to share housing costs.
  • Or downsize to a less expensive home.
The sooner you can build an emergency fund, the better.

Know where your dollars go.

Track your daily spending for at least a month, and look for discretionary purchases. Cut back where you can, spending only on essentials — especially if you're in debt-pay-down mode.

Pay with cash or debit.

Don't make matters worse. Avoid using credit cards for most purchases unless you plan to pay off the balance quickly. Otherwise, your groceries, gas, clothing, and household goods could cost significantly more than you originally paid.

Save for emergencies.

Flat tires, home maintenance, medical emergencies, and other surprises can strain finances quickly. Set up regular transfers to an emergency fund — even $500 can help cover unexpected expenses, so you don't need to turn to a credit card or a high-interest loan.

Shedding bad debt puts you in a better position to handle a financial event like job loss or medical crisis. It also may help your credit score and reduce stress. Maybe best of all, it leaves you with more income to spend — and save! — as you wish.

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