How to Get Out of Debt

Living under the worry of debt can feel paralyzing and almost impossible to escape.  According to Debt.org, the average U.S. household carries an average debt of $145,000. With the cost of living rising, U.S. households are spending more on everything from food and transportation to rent and medical care, so it’s easy to see how quickly debt can spiral out of control. Fortunately, there are some steps you can take to help you take back control of your finances. Here’s how to get started.

You should begin building a strategy based on the breakdown of your total debt. Gather all of your bills, bank, credit card, and loan statements and write down the monthly payment, total balance, interest rate, and term for each debt owed. Visit AnnualCreditReport.com to get your free annual credit report to help you catch any debt you may have forgotten. Don’t just rely on one credit bureau. Make sure you get your report from all major credit report bureaus: Experian, Equifax, and Transunion as not all lenders or creditors report to the same agencies. 

If you’re spending more than you’re earning, it may be time to rebalance your budget and/or work on better spending habits. Categorize your expenses as fixed or variable. Fixed costs like rent and car payments stay the same from month to month while variable costs like groceries and gas vary each month. After looking at your income versus your expenses, take a look at your needs and your wants. A common budgeting system is the 50/30/20 rule. This rule states that your after-income should be split into three categories: 50 perfect for needs, 30 percent for wants, and 20 percent for long-term savings. 

While the definition of needs may vary from person to person, some examples of needs are housing, food, utilities, and transportation. Just like needs, wants can also vary but they can be defined as expenses that make life better but aren’t necessarily needed like vacations or expensive shoes. The great thing about the 50/30/20 rule is that it also helps you allocate more towards financial goals like paying down debt or saving for retirement. 

Need help building a budget? Hughes members can take advantage of Hughes Unified Banking, or myHUB, which allows you to sync your financial accounts in order to track, monitor, and learn from your finances in one convenient, user-friendly site. 

Once you’ve worked out your budget, it’s time to put any remaining money towards debt. Paying more than the minimum balance can help you pay off your debt faster and pay less in interest. For example, if you have $10,000 in credit card debt with a 10.9% interest rate and a $300 minimum payment, it will take you three years and four months to pay off and you’ll end up paying almost $2,000 in interest.

If you allocate just a hundred dollars more to that same debt, you could pay off the debt in two years and five months and save almost $500 in interest in comparison to paying just the minimum. Use the Hughes financial calculator to figure out how much your additional payments can help with paying off debt.  

High-interest rates can be one of the most difficult obstacles when tackling debt. High-interest rates usually mean bigger monthly payments which can then lead to the possibility of defaulting. If you’ve found yourself with credit cards or a car loan with high-interest rates, it might be a good idea to consider looking for a better rate elsewhere. Transferring your debt to a credit card or loan with a lower interest rate can help save you money in the long run. Explore Hughes’ refinance calculator to see how much you can save with a better interest rate. 

If you’re facing a multitude of monthly payments that might be unmanageable, try eliminating debt using the snowball method. The snowball method states that you make minimum payments on all of your debt except for the smallest of your debt which you’ll apply more than the minimum payment. This will allow you to quickly pay off your debt and “snowball” those payments to the next debt and so forth. Eliminating the smaller debts first will provide some motivation to help keep you going.