A young couple working on their budget

If you feel overwhelmed by a significant amount of personal debt, you’re not alone.

In a recent study, 80% of Americans admitted to carrying a large amount of debt, an average of $38,000 in personal debt, to be exact, with credit cards being the number one source of debt, which accounts for approximately 25% of all debt.

The numbers confirm that personal debt seems to resonate with most Americans, so if you’re looking to break the cycle of making only the minimum payments and maybe even raise your credit score a few points, you’re not alone. Here are five strategies you can implement in your life today.

Find Out Where Your Money is Going

If you’re having a hard time paying more than the minimum balance on your loans or credit card bills, it’s time to take an honest look at where your money is going.

Sarah McLean, Marketing Coordinator at outdoor power equipment distributor PACE, Inc., was weighed down by $69,375 of student loans and credit card debt until she started manually tracking where every single dollar of her money was going. She made it a point to sit down every week to rake through her bank transactions and categorize every expense.

“It was eye-opening,” McLean recalled. “I felt like I was budgeting well and allocating money correctly, but I was wrong.”

The best way to audit your spending is by going through your bank transactions line by line and categorizing each expense into the following:

  • Essentials (living expenses, like rent payments, mortgage, utilities, etc.)
  • Savings and debts (repayments on student loans, credit card bills, auto loans, etc.)
  • Personal spending (flexible; could be leisure activities or unexpected expenses)

It might seem tedious at first, but it forces you to face the facts: If most of your money is going to personal spending, like eating out at restaurants or going to the movies every weekend, you might want to re-evaluate your financial priorities. We’ll talk more about that next.

Create a Budget Plan … and Stick to It!

Once you categorize each of your expenses into its respective category – essentials, savings and debts and personal spending – calculate what percent of your income goes into each category.

Some suggest 50% of your income should go to essentials, 20% for savings and debts and 30% for personal spending, otherwise known as the 50/20/30 rule. McLean used a similar approach when tackling her finances, but took it a step further.

She created three separate bank accounts: one specifically for bills (including debts), one for savings and one for spending. She divided her paychecks into direct deposits that went to each respective account.

Any additional money received beyond her paychecks, such as tax refunds and bonuses, went directly toward paying off her debt. Any money left over in her weekly spending budget went into her savings. This allowed her to slowly chip away at her debt, currently at $61,770, and even build up her savings account to $12,000 in a little over a year and a half.

A good way to stay on track with your budget is by setting up automated payments for your essentials, like monthly rent or mortgage payments, utilities, internet and cable. This will allow you to better track what you’re spending and ensure that you’ll never miss a payment, which in some cases can negatively impact your credit score.

Make More than the Minimum Payment

When you’re struggling with paying off your debt, it can feel like you’re running on a treadmill. Sure you’re moving, maybe even working up a sweat, but are you actually getting anywhere?

The debt treadmill is a metaphor for making the minimum payments on your loans or credit cards. Sure you’re putting money toward paying off your debts, but the ever-accumulating interest rates make it feel like you’re not moving forward.

That’s why McLean suggests paying more than just the minimum balance on your debts.

“Small monthly payments might seem great in the short-term, but they usually mean you’re paying way more money long-term,” McLean explained. “Once you do take on debt, your priority should be to get rid of it.”

There are a few ways you can get out of debt without getting lost in a sea of interest. Opposite of the debt snowball method where you pay off your smallest debts first, the debt avalanche focuses all of your excess finances on the debt that has the highest interest rate, then work your way down to the next highest interest rate and so on.

You could also transfer your debts to a lower-interest credit card. You’ll still be expected to pay the same monthly minimum each month, but the interest won’t be as high.

Get a Grip on Your Credit

If you’ve struggled with making the monthly payments on your debts, or on other expenses because of your debts, you might have a lower credit score as a result.

The same happened to McLean, who was having trouble making her minimum student loan payments.

“Student loans impacted my credit score primarily because I hadn’t paid on them,” McLean revealed. “The payments were so high and so overwhelming that in my early 20s it seemed easier to ignore them than to deal with them, which lead to late payments, bringing my credit score down to 515.”

After avoiding payments on her student loans, McLean focused on maintaining on-time payments on her debts by setting up auto pay in her bills account. After that, it was just a matter of controlled spending and never carrying a balance on her credit card. This kept her utilization low and avoided money going to paying credit card interest and instead paid off actual debt. As a result, she was able to raise her credit score to 624.

“I learned pretty quickly that there is no way to really game the system with credit scores,” McLean said. “They’re meant to be indicative of your credit trustworthiness over time, so time and consistency are the only things that will improve them.”

Don’t Wait to Make a Financial Change

Overcoming a significant amount of personal debt will take time and discipline. Depending on how much you owe and current your interest rate, you might find that you have to go back and adjust these steps a few times in order to get your spending just right.

Don’t wait until you’re ready to make a significant purchase, like buying a new car or buying a home, to get your debt and credit in order. Debt repayment and credit score rebuilding takes time, so if you know you’ll need a car or a home in the future, start working at your finances today.

“Once I was in a serious relationship where we started talking about buying a house and raising a family, I started thinking about getting my finances in order,” McLean explained. “It wasn’t until I desperately needed a new car and couldn’t qualify for a loan on my own that I realized just how serious having a bad credit score actually is! If I couldn’t qualify for a car loan, there was no way anyone was going to offer me a mortgage.”

Have you overcome significant debt and have tips on how our readers can do the same? Share your wisdom in the comments section below!

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