Paying off your consumer debt can be one of the best ways you can improve your financial situation. Once you have paid off your debt, you also are finished paying interest to your creditors and have debt free living. The money that you were paying in interest can then be used for other items.

Paying off debt can help your credit score, which makes it easier to borrow in the future for purchases that can improve your net worth, such as buying a home. While paying off debt isn’t easy, it can be harder if you make some mistakes during the process.

Knowing you want to pay off your debt is not enough to successfully work on paying off debt. Instead, you need to set clear goals and have a plan on how to tackle this task.

Decide which Debt You’ll Pay First

You need to decide which debt you want to pay off early. Some debt won’t make sense to pay off early, such as student loan debt or mortgages. These types of debts can come with tax breaks and may have lower interest rates so it doesn’t make sense to pay them off ahead of schedule.

In addition to figuring out which debts you want to pay off early in the process, determine which debts you want to pay off completely first. If you use the debt snowball method then you pay off the lowest balance first so you get momentum. If you use the debt avalanche method, you pay off the debt with the highest interest rate in order to save more money on interest costs.

Calculate How Much Money You Have Available

Figure out how much money you are able to devote to paying off debt. You need to pay off more than minimum payments if you want to make progress on your journey to becoming debt free. Set up a budget so you can see what you can actually afford each month.

You need to total up your debt. If you don’t have a clear understanding of how much you owe and whom you are paying it to then it’s much harder to create a plan to become debt free.

Part of your plan should not be making payments on a whim. If windfalls occur, such as tax refunds or work bonuses, then it’s a good idea to put that money toward paying of debt. However, if you just throw money at balances without looking at the overall picture, it can cause issues. This is why it’s important to have a plan and then stick to it.

Figure What Got You into Debt

It’s important to change your spending habits and start to get to the root cause of the debt. Many credit card debts can start in a few ways. These include a job loss with no cuts in spending or a bunch of unexpected and random expenses that come in at once. Before you can get into a debt reduction plan, you need to address what got you into debt in the first place.

Change Spending Habits

Once you have figured out what got you into debt, you can’t continue to spend like you normally would. You can’t keep doing the same thing over and over again and then expect to get different results. In order to get out of debt, you need to know what is reasonable for you to spend every month and then change your spending habits to stay within your means.

Create a Budget

Creating a realistic budget can help you overcome unnecessary spending. Review your current expenses and then decide what is necessary and which ones are more than you can handle. Even making small cuts to just everyday spending can make a big difference. This could mean temporarily cutting services like cable or taking a break from dining out. It may require some serious lifestyle adjustments if you really want to tackle your debt.

When you continue to use your credit cards while paying them off, this doesn’t help either. Many people think they can get away with this by paying off the new charges each month plus the added amount toward the old balances. This is often driven by the desire to earn credit card rewards, such as cash back or airline miles. It doesn’t matter what kind of recordkeeping system you are using, this method hardly ever works. It usually results in extra interest being charged that exceeds any rewards you earn. You need to stop using your cards when you want to pay them off.

When you change your spending habits, you can also use this to your advantage when you are done paying off debt. When you are in the process of paying off debt, you may have to make some cuts that are uncomfortable, such as not eating out as much as you would like. When you get out of debt, you can resume some of your spendings but it’s best to stick to a budget so you don’t get yourself into debt again.

Just because you are paying off debt, it doesn’t mean you can forget about your emergency fund. While it may seem counterintuitive to save money for emergencies when you want to devote every dollar you can to debt repayment, it’s necessary. If you don’t have money set aside when something unexpected happens then you will have to borrow money.

If you are making progress on paying off debt and then you have to put a large bill on your credit card due to an emergency, you will undo your efforts. You could get trapped in a never-ending cycle and then it’s easy to lose momentum. In order to make sure this doesn’t happen, you still need to have a small emergency fund so you can get started paying off debt. Start saving for emergencies with a savings account. Do your research and go with a reputable lender. Put in your information below for potential offers:

When it comes to paying off debt, not all debt is created equal. When you are way in over your head with debt, start to focus on any one that has a judgment against it or can put liens on you. Having your car repossessed or your wages garnished are not ideal situations and you want to avoid them at all costs. From there, focus on high interest balances since you are paying the most on these.

It may make sense to focus on debt consolidation for this to work. It’s important to find the right debt consolidation loan that makes sense for your situation. Some debt consolidation loans come with origination fees but you could make up for those with your savings if you spend some time researching.

Which debt you are focusing on should be part of your plan. If you have multiple sources of debt then it can be tempting to pay off a large portion of each one. Know which debts you are focusing on but don’t forget to make the minimum payments on each of your bills and loans.

When you are overwhelmed with debt, it can be hard to find a solution. Credit counseling can be a legitimate option if you choose a reputable company that has your best interest at heart. There are different groups you can connect with to find professionals who review your financial situation, educate you on personal finance basics, and help you get back on the right track.

Customers need to be aware of shady debt relief organizations. Any for-profit credit counseling groups can be a red flag. You should also watch out for companies that make too good to be true promises or any guarantees about your debt relief. Initial counseling sessions should be free and not have strings attached.

Understand what you are signing up for before you start. Even programs that are there to help you with paying off debt will take time before you reach the results you want. Patience is key when working your way out of debt.

Just like not saving for an emergency fund is a mistake, so is not putting money in your retirement savings. Retirement savings help contribute to your financial stability after you stop working. The sooner you start planning, the better off you will be. Your current debt shouldn’t be swaying you from planning for you future and you should find other ways to cut your spending instead.

You also don’t want to tap into your 401k to pay down debt. While a 401k can let you borrow money and pay it back with interest, there can be significant tax implications. When you put money into your 401k, you are doing so with pretax dollars. When you pay back the loan, you are using after-tax dollars so you have to pay taxes again after you withdraw the money during retirement.

If you don’t make good on the loan terms then your loan is considered a distribution. If you are younger than the retirement age then that means you pay a penalty. If you leave the job for any reason then the balance will be due and you have to pay it back sooner than you originally planed. By taking your retirement money out of the market, you are robbing yourself of any future gains. When it comes to retirement savings, time is the most important factor. The longer you are invested then the more money you will have when it comes time to retirement.

Are you taking the time to verify the information on your credit report? Many people don’t and this leaves them vulnerable to errors. Every year, you are able to receive one free copy of your credit report from the major bureaus. Take advantage of this and review the information. Look for any delinquencies or debt that isn’t yours.

Be sure to file a report if you are victim of fraud. Looking for errors on your credit report can help you keep your credit score high, which helps you get lower interest rates. Lower interest rates can mean you pay less on your debt and it can make it easier to pay down debt faster.

Also avoid any mistakes that can lower your credit score. For example, once you pay off your debt you may be tempted to close your credit cards. Part of your credit report is how much credit is available to you. If you close your accounts, you have less credit available to you and this has a negative impact on your score.

Additionally, it changes the average age of your accounts, which can also have an impact. Sometimes, it can make sense to close your card, especially if the card has a high annual fee. Keeping credit cards open and choosing to not use them is a better idea for your financial future. Another mistake that could be affecting your credit report is not paying your bills on time. Don’t get focused on one debt and then forget your other ones.

Ways to Get Out of Debt

Now that you know about some of the mistakes you can make when paying off debt, it helps to know how to get out of debt.

Tools to Help You Get Out of Debt

Motivation, having a budget, and changing your spending habits are all useful when it comes to paying off debt. However, there are also debt financing tools to help you with the process.

Ways to Pay off Debt Faster

If you are working toward paying off debt, there are some things you can do to make the process faster.

Conclusion

Paying off debt may not be an easy task but you can feel so accomplished once it is done. In order to successfully pay off your debt, you need to make sure you aren’t making some of the top mistakes that others have made. There are different ways to get out of debt and ways to pay off your debt faster if you want to. There are also tools that you can use to help make paying off debt easier. Carefully look at your situation before you decide to move forward with any plan to make sure it makes the most sense for you.