How to Get Out of Debt With Secure & Unsecured Bills

Debt is a large part of most American lives. Nearly anything can be financed on credit and big-ticket items like homes, boats and cars are almost exclusively purchased with the help of long-term debt. If not controlled correctly, debt can quickly become an overwhelming and stressful problem. If you are struggling with both unsecured and secured debt, you must first make a commitment to repay the debt and then devise a strategy to attack it with vigor.

Instructions

1

Access your credit report. This will give you a candid overview of your total debt picture. You can find a free copy of your credit report at Annual Credit Report (see Resources). Review all open trade lines. Add up all balances and payments to determine your total monthly payment and total outstanding debt. This could be humbling.

2

Review your expenditures from the last three months. This should show you a picture of your spending habits. Look for areas to cut back. Think about your essential and non-essential payments. Non-essential bills, like entertainment expenses, clothing purchases and dining out, must be cut drastically. Remember to save a small budget for fun, though. Without some relief each month you may end up resenting your strict budgeting.

3

Calculate your debt-to-income ratio (DIR) and disposable income (DI) after you redesign your budget. To calculate DIR, divide the sum of all monthly payments by your gross monthly income. Multiply this figure by 100. To keep your finances on track, you must keep your DIR below 50 percent. To find your DI, subtract the sum of all monthly payments from your net monthly income.

4

Decide how much of your disposable income you can commit to debt elimination. Make sure to keep a small amount each month for fun expenses and emergencies. The vast majority of your disposable income, though, should be allocated for debt repayment.

5

Find out the interest rates on all credit accounts. The best strategy is to begin by attacking your highest-interest account first. Make minimum payments on all other debts. Use the remaining funds in your disposable income budget to make large payments against your high-interest account.

6

Repeat this strategy once you repay the first debt. Attack the account with the next highest interest rate. This is called "snowballing," because as you eliminate debt, you end up with more money to repay other debts. You'll ultimately end up with a much larger disposable income budget.