How To Get Out of Debt When You’re Behind on Bills

For consumers, having a budget may be an afterthought when the economy is booming. But it’s a different picture when loan interest rates are rising and inflation hits double digits. That’s what the U.S. and many other countries have been experiencing. Under these circumstances, more people are taking out emergency loans to cover basic living expenses.

That leads us back to the subject of budgeting. Understanding what’s coming in and how much is going out every month is the first step to getting out of debt. Trying to pay off credit cards and loans without creating a budget can be frustrating. In this article, we describe the process of creating a budget, cutting expenses, and paying down debt.

Step 1: Create a sensible budget

Creating a sensible budget is the best way to start your debt payoff journey. A budget begins with a two-column list: your income and your expenses. The income column should have your wages and any other sources of income you may want to include.

Then, list your expenses and categorize them as either essential or non-essential. If you’re seriously in debt, non-essential expenses need to go. That might mean eliminating movie channels and downgrading to a cheaper phone plan. Luxuries are not required when you’re paying interest on that outstanding debt.

Step 2: Set up a direct deposit and use autopay to pay bills

Cutting expenses and making bill payments on time are key steps in preventing your credit score from dropping. It’s not likely that you’ll miss a payment if you set up automatic withdrawals from your bank account. Get that accomplished, and then work on paying your debt down.

The trick here is to make sure deposits to your account cover all the expenses you schedule for autopayment. If not, go back to your budget and find other expenses you can cut. Maybe cutting cable completely and keeping just internet service is a better option. Look at subscription services too. Each of them may be a small dollar amount, but they add up. Try to become as lean as you possibly can.

Step 3: Debt snowball and debt avalanche

Some experts tout a debt payback method called “debt snowball.” It means making minimum monthly payments on credit card and loan debts, allowing you to add an extra payment to the one account with the smallest balance. You do this until that account is paid off, then do the same for the next smallest account.

Other experts advocate using the “debt avalanche” method of paying off debts. In this case, you prioritize payments to the accounts charging you the highest interest rate. Either method can be effective. It’s a matter of personal choice on which method to choose if you decide it could be useful.

Important Tip: Don’t use your credit cards while paying off debt

Many people make the same mistake. Continuing to make purchases with your credit cards prolongs the process of reducing debt. If you truly want to get out of debt, you need to put the credit cards away. Once you pay them off, think carefully before using them again. Keep in mind that debit cards work just as well when you’re shopping. For instance, you keep the same cardholder transaction dispute protections, and you won’t be paying interest on your purchases.

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