The world gets more expensive every day. Unfortunately, wages have remained more or less the same. To bridge the gap, many Americans are turning to credit and loans for help. Is it any wonder that nearly half of all 18–34-year-olds feel like they are “drowning in debt”?
When you feel like you’re buried by a mountain of debt, other things feel less important, including friendships, work, and your mental and physical health.
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11 signs you’re drowning in debt
- Your phone rings all the time because the debt collectors and credit card companies keep calling you
- Your credit score is falling lower and lower every time you check it
- Your credit report is mostly negative information
- You pay a lot of late fees
- You juggle your bills, paying only some one month and then others the next
- All of your credit cards are maxed out
- Even though you pay your payments each month, your credit card balance keeps going up
- You are depending on high-interest payday loans, title loans and cash advance apps to help you get from payday to payday
- You’re far enough behind on car payments that you’re worried about repossession
- You’re so far behind on mortgage payments you’re worried about foreclosure
- You barely make the rent each month and often face “pay now or get evicted” notices posted on your door
If any of these sound familiar, you need to take quick action.
Are you drowning in debt?
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12 steps to becoming debt-free
Even though it might not seem true now, you can dig yourself out of debt. It will take time and some definite work on your part, but it’s possible! Here are some steps to help you get back on track.
1. Acknowledge the problem and research your options
The first step to fixing your financial situation is to admit that you have a problem in the first place. Once you’ve faced your debt, you can start figuring out how to deal with it. Many great resources are out there to help you with this. Here are a few to help you get started:
- The So Money podcast
- Well Kept Wallet (a personal finance blog)
- A Cat’s Guide to Money (book by Lillian Karabaic)
2. Form a plan
The best way to build a plan is to start at the end and work your way backwards. You have a goal. What do you need to have in place to reach that goal? Now, what do you need to do to get those things in place? And what needs to happen so you can take those actions? You get the idea.
Work your way backward until you have an actionable step (or a few) you can actually take. Then just follow your own roadmap.
3. Check your credit score and review your credit reports
Did you know that most people have errors on their credit reports? It’s true! Make sure that your credit report is error-free. Not only will this raise your credit score, but it will help you figure out exactly how much debt you owe.
4. Talk to a credit counselor
You can usually get credit counseling for free or at a very low cost. The trick is to work with a nonprofit credit counseling agency. Most offers a free initial consultation and will help you review your finances and help you create a repayment budget.
If you need help managing your debt or don’t think you can manage that plan yourself, they will create a Debt Management Plan and run it for you, but there will be a fee for this.
5. Negotiate with your lenders
Lenders and creditors would always rather get something from you than nothing. If you’re having trouble making payments, contact your lenders and ask them to help you. Sometimes they’ll give you a lower interest rate or reconfigure your account so that your minimum payments are smaller.
6. Try debt consolidation
Depending on your situation, you might be able to accomplish a lot with debt consolidation. Debt consolidation is exactly what it sounds like: using a single loan to pay off several credit cards or smaller loans. There are even some lenders that will offer personal and debt consolidation loans for borrowers who have bad credit.
Pro tip: You can consolidate most unsecured debts, including medical bills, credit card debt, personal loans and even some private student loan debt.
If you’re a homeowner, a home equity loan can be an excellent, low-cost way to consolidate debts. Just keep in mind that if you skip making the monthly payments on a home-equity loan, you’ll be putting your home at risk of foreclosure.
Consolidating your debt will dramatically reduce how much of your money goes toward interest payments and can be a great way to save some dough.
READ MORE: Debt consolidation vs. debt settlement
7. Start a budget
A budget is sort of like a to-do list for your money. After all, if you don’t know where your money is going (or supposed to go), how will you know where to adjust?
If you’ve never made a budget or have trouble sticking to one, help is available. There are plenty of free budgeting tools online. But the easiest way to start one is to add up all of your monthly income, then add up your monthly expenses. If the expenses are higher than income, you’ll need to look for ways to cut back. (Look for cheaper cell phone plans, cut some streaming services and even consider a roommate if you’re living alone). Once your income and expenses are on track, you can create a debt repayment plan.
8. Create a repayment plan
There are two basic types of debt repayment plans: snowball and avalanche.
- The debt snowball: you pay the minimum amount due on every debt and any money leftover in your budget is put toward the balance of your smallest debt. When that is paid off, you prioritize the new smallest debt. The idea is that paying off a balance can help you build momentum to stick with your plan.
- The debt avalanche: you pay the minimum amount due on every debt and put any leftover money toward the debt with the highest interest rate. The idea here is that you will pay your debt down faster and for less than you’d spend using the snowball method.
Pro tip: Prioritize repaying your car loan. Because that’s secured debt, your car can be repossessed if you don’t make your payments. If you lose your transportation, you won’t be able to get to work.
You can also put together a plan of your own. Just make sure you stick to it.
9. Stop investing
Many experts will tell you that you should be saving for retirement. That’s generally true, but the golden rule of investing is don’t invest money you cannot afford to lose.
Right now, you can’t afford the risk that comes with an investment portfolio or market-based retirement fund. Put these things on pause. You can always go back to them later. The one exception could be if your company offers a company match. If it does, that’s basically doubling any money you invest, so it’s worth contributing that much if you can manage it.
Pro tip: The only exception is an emergency fund. Try to set aside at least $10 a month in a fund earmarked for emergencies.
10. Eliminate all nonessential purchases
It is all too easy these days to click “add to cart” and something is on the way directly to your home. Is that item food? Shelter? Medication? Essential for transportation to and from work? Is it for a mandatory work dress code? If not, then you probably don’t need to buy it.
This doesn’t mean that you can’t have any fun. It just means that you have to get creative. Shop at thrift stores, explore “buy nothing” websites and check NextDoor, Craigslist and even Facebook Marketplace. Look for free entertainment in your area, and sign up for a library card. Many offer extra services like movies and e-books.
There are a lot of items that can be found for free if you’re willing to hunt them down.
11. Cut up (or hide) all of your credit cards but one
In our current digital age, the equivalent of card cutting would be deleting the cards from your Apple or Google wallet. Sure, you can simply click over to your creditor’s website and look up your card info. Hopefully, having to take those extra steps to make a purchase will give you time to consider whether or not it’s essential.
You can also call your credit card companies and ask them to set your cash advance limit to zero and lower your available credit. That allows you to keep the account open but will prevent the risk of overspending.
The one card you keep open (for emergencies only) shouldn’t be easy to access. Remove it from your digital wallet. Only allow auto-payment for necessary bills, like utilities or water.
12. Look for ways to earn extra money
If you can do so, put some work into bringing in more money. For instance, maybe negotiate for a higher salary at work (or find a job that pays better).
Other options would be to ask for overtime work, take on a second job, or start a side hustle. Side hustles are very popular these days.
READ MORE: Best ways to find cash in a pinch
You’re not alone
The average American has around $90,000 in debt from credit cards, automobile loans, student loans, and health care costs.
Federal Reserve data shows that Americans pay a collective $1.75 trillion in student loan debt. Experian says the average student loan taken out by millennials is nearly $39,000.
The Survey of Income and Program Participation (SIPP) says that one in ten Americans carry “significant medical debt.” About 6% of American adults owe more than $1K in medical debt, while 1% have medical debt of more than $10K.
In terms of credit card debt, Americans owe a whopping collective total of $843 billion, and the average cardholder carries between $5,000 to $6,000.
When you consider all of this, you are far from the only person who feels like they are drowning.
If you’re in immediate crisis, seek help
Forget your pride, it’s time to ask for help. Reach out to your friends and family members. Set up a GoFundMe.
Seek out local food pantries, church programs or other resources.
If you need help now, you can also contact your local department of human services or a nonprofit community agency by dialing 2-1-1. These places can help you access programs like LIHEAP, WIC, emergency rental payments, community health centers, Medicaid, SNAP, etc.
READ MORE: If you need help now, here’s how to get free money and other assistance
Other debt relief options
Some people’s debts are too extreme to get out of debt without professional help. If you’ve already tried the steps above or don’t think they will work for you, here are a couple of other options.
- Debt settlement: A third-party company will contact your creditors and settle your debts for a total that’s less than you owe. There are no upfront fees. You will pay them a percentage of the enrolled debt once you’ve reached settlement agreements.
- Bankruptcy: If you need a fresh start, bankruptcy will stop creditors’ calls and a bankruptcy trustee will be appointed to help you navigate the legal process. However, there will be some mandatory filing costs you’ll have to pay.
The bottom line
Remember, you are not the only person struggling with debt. There are many other people facing situations similar to your own. What matters now is how you resolve your debt. Use the tips we’ve shared here to help you do exactly that.
