Getting out of debt is the most decisive step you can make towards financial stability. In a typical year, the average consumer spends thousands of dollars on debt from credit cards, car loans and mortgage payments. As of November 2012, the average household owed $7,194 in credit card debt. (Source: The Aggregate Revolving Consumer Debt Survey by the U.S. Federal Reserve).
Given that many credit cards have a 15 - 25 percent interest rate, consumers are wasting hundreds of dollars in interest each year.
Here are seven tips that can help you get rid of your debt.
1. Make a Budget - People get into debt because they spend more money than they make. A budget helps you avoid doing this. It allows you to see how much money you earn and where that money is going. It allows you to pinpoint areas where you are wasting money by eating out at expensive restaurants or buying a $5 dollar cup of coffee every day.
Create a bare-bones budget that allows you to pay for necessities like your rent/mortgage and utilities. Set aside everything else to pay off your debt as quickly as possible. Hold off on buying luxury items come until after you've conquered your debt. Highlighting your hair, buying new clothes and eating at restaurants are luxuries, not necessities.
Read more: What's a Want and What's a Need?
2. Freeze Your Credit Cards - Stop using credit cards if you have debt. Start carrying cash instead. Stick to the budget you created and only buy what you can pay for with cash.
Credit cards have high interest rates. The only people who should carry credit cards are those who can avoid the temptation to overspend. If you think you may buckle to temptation, remove credit cards from the picture entirely. Leave your cards at home. Better yet, freeze your credit cards in a block of ice so you can't use it on impulse.
Read more: 7 Times You Should Avoid Credit Cards
3. More Than the Minimum -- Credit card companies profit off their interest rates, knowing that many users only make the minimum monthly payment. This is good for credit card companies but bad for your wallet.
Let's say that you have $5,000 dollars in credit card debt at 18% interest, and you are only making the minimum payment of $150 dollars per month (3 percent of the total bill). It will take you 3 years and 11 months to pay off the debt, and you'll spend $2,000 dollars solely on interest. That's a lot of money.
Responsible credit card owners pay off their entire bill from month to month. If you cannot do that, then at least pay more than the minimum payment every month until the debt is gone.
4. Biggest Debt First - Got a lot of credit card debt? Many consumers are so overwhelmed by their debt that they don't know where to start. Here are two methods to do it:
The Snowball Method - Begin with the card with the smallest debt. Concentrate on paying all of that off as soon as possible, even if it means you can only make the minimum payment on the other credit cards. The sooner the debt is gone, the better. Once the smallest card is paid off, then start the process again with the second- smallest until all your cards are paid.
The Stacking Method - Begin with the card with the highest interest rate. Paying it off as soon as possible, while only making the minimum payment on the other credit cards. Once your highest-interest debt is repaid, focus all your efforts on the card with the second- highest interest rate.
Read more: The Snowball Method vs The Stacking Method
5. Renegotiate Mortgage Rates - Renegotiating your home mortgage interest rate allows you to save more money per month. For example, if your interest rate drops from 7% to 5% on a $150,000 mortgage, you'll save $192 dollars per month. (Then you can apply this money towards paying off your credit cards!)
Not everyone is able to renegotiate their mortgage, but if you are suffering from financial hardship due to a job loss or serious illness, many lenders will renegotiate provided this is for your primary residence. Many lenders also participate in the Home Affordable Modification Program via the federal government. Qualifications for this program state that you must owe $729,750 or less, spend more than 31% on your mortgage, and had obtained your mortgage before Jan. 1, 2009.
6. Refinance Mortgage Rates -- Refinancing is another option for homeowners looking to get out of debt. Refinancing does not pay off (or forgive) your debt. Rather, it restructures your mortgage into a lower interest rate.
Although refinancing brings down your monthly costs, you'll also have to pay for the closing costs. Closing costs vary from a few hundred to several thousand, depending on the value of your home and the size of your mortgage. In some cases, closing costs can be more expensive than the actual savings you earn from refinancing. Compare how much you'll save through lowered interest rates versus what you'll pay in closing costs. Pick the option that gives you the biggest overall savings, even if that means coping with higher monthly payments in the short-term.
7. Start Saving -- Once you are finished paying off your credit card debt, start putting that extra money into a savings account instead of rushing out to buy another expensive item with a credit card. Make a habit of saving in advance for purchases, rather than going into debt for them.
Read more: Create Multiple Sub-Savings Accounts