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Home » Budgeting, Debt Management

How to Get Out of Debt: Step 1 – Stop the Bleeding

Last updated by on December 30, 2013

Getting Out of Debt

In a way, is a solid get out of debt blog – I hate debt, urge readers to increase their personal savings rate as much as possible.

That said, getting out of debt deserves it’s own strategy.

There are many theories on what the best way to pay off your debts is, but before you should even start talking about paying off your debts, you’ll first need to stop the bleeding (accumulating more debts). In order to do that, let’s first discuss good debt, bad debt, secured debt, unsecured debt, and Effective Annual Rates (EAR).

Good debt

This is the stuff that generally results from an investment in yourself (student loans) or something that appreciates in value (house) that will ideally leave you in better economic standing over the long-term. Typically, these debts will carry a lower rate of interest (unless you took out an ARM mortgage).

Bad debt

Any debt that will not benefit you in the least bit, in any way. Most typically, credit card debt, which carries a very high interest rate.

get out of debt

Secured debt

Debt that you take on that is backed up by collateral (a possession that can be taken from you). This includes a mortgage and a vehicle, for starters. Essentially if you do not make your payments, you may lose the possessions that you purchased via this debt. Due to the fact that nobody wants to lose these things, the borrower has little to zero bargaining power with the creditor. Because there is collateral involved and default is not highly likely, creditors can afford to offer lower long-term interest rates.

Unsecured debt

Debt that has no collateral behind it. This includes credit cards. If you don’t pay off your debts here, you may be harassed by creditors and bill collectors the rest of your life, but they have little power other than ruining your ability to receive secured debt at good rates in the future. That’s important to you, but for the most part this is of little consolation to them if they can’t get their money back.

Creditors that offer unsecured debt charge high interest rates partly because they have little power to do much if you don’t pay them back, and many people will default, declare bankruptcy, or just switch cards. Now, I’m not recommending that you don’t pay off your debts with these guys, but it is important that you realize that you do have a bit of leverage with them. This leverage gives you negotiation power, and we’ll discuss how to use it.

Effective Annual Rate (EAR)

Credit card companies will often quote you a nominal APR (annual percentage rate), which is compounded monthly. However, this is usually not what you end up paying. Due to the compounding, you pay more. EAR takes into account the compounding to give you an effective rate that you actually pay on your card. It is important to know the distinction between the two, because you are likely paying more than you think on your card.

Now that we’ve discussed the different terms, let’s discuss the steps you can take to stop the bleeding from debt.

Get out of Debt Step 1: Cut your cards

Literally, slice and dice them. If you’re in debt, you’ve lost the privilege to try to use cards to better your financial health. You don’t need them, so stop convincing yourself that you do. An alternate debit card will always pay for the same things that a credit card can, and it’s money that you do have. Or you could even go one step further and use checks or cash. The convenience of not feeling the repercussions of poor spending habits is the biggest barrier to you getting out of debt. Eliminate the convenience and you eliminate a huge part of the problem.

You may also want to transfer your debt to a 0% APR balance transfer credit card to stop the bleeding on paying interest on that debt.

Get out of Debt Step 2: Know your debts

I’ve created a simple document for you to keep track of all of your debts, how much you owe, and what you’re paying in interest on each:

Debt Planner Spreadsheet (google doc – feel free to copy and save your own editable version)

debt-planner-spreadsheet1 (.xls/.ods)

Document all of your debts and label them as good or bad based on the descriptions above. If you don’t know the EAR on your debts, substitute APR, but realize that APR is almost always less than what you are truly paying.

Get out of Debt Step 3: Pay less on your bad debts

Here is where your leveraging power comes into play. Your worst type of debts are going to usually be your credit cards which are also unsecured debts. Because credit card debt is unsecured and you are free to switch to any other credit card company and transfer your balance, you have leveraging power. I would suggest calling up every credit card company that you have a balance with and asking for a better rate.

My recommendation is to do some research and see what other card companies are offering for non-introductory rates. This will give you ammunition if your existing company won’t match or beat their rates, or at least it will give you realistic expectations on what you can get. You don’t really want to switch companies because it will give your credit report one more black mark (ending your long term account, and starting a new one).

How to Negotiate a Lower Credit Card Interest Rate

This is all good negotiation leverage. Let’s say you are currently paying 18%, you could have the following conversation with your card company (as with any negotiation, it pays to be congenial and cooperative with them versus combative):

You: Hello, Mr(s). credit card customer service representative. I am having trouble paying off my balance as fast as I’d like and an 18% APR is way too high for me. I’ve been doing some comparative shopping for better rates and have found a few balance transfer cards that will give me a 0% introductory rate for the first year and then 10%, thereafter. I’ve enjoyed being your customer, so I would hate to switch, and I wanted to ask you to match that permanent rate of 10%.

CSR: Well, Mr. Bad Debt, our rate is competitive with the industry, but let me check to see if I can make a special offer.

<long pause>

CSR: It turns out that we can offer you 12%. How does that sound?

You: I appreciate the offer, but I literally would be able to switch tonight to (reference different card company) and get a permanent 10% rate.

CSR: I will need to check with my supervisor to see what we can do. One moment please.

You: Great, thank you.

CSR: OK, I checked with my supervisor, and we are able to offer you 10.5%.

You: OK, that is enough for me to stay with you for now.

<actual conversation may vary>

Step 4: Balance your budget by spending less than your disposable income

Check out these posts on using a budgeting spreadsheet and learn how to balance your monthly budget to see all of your monthly expenses and figure out where to cut back. Your first step should be to eliminate all unnecessary monthly expenses so that your card balances don’t keep snowballing with new debts (your interest snowball is going to be tough enough to overcome). If you’re still spending more than you make then you’re going to have to either A. make more money, or, B. cut your expenses. Usually the latter is easier. It all comes down to living within your means.

Next time we discuss getting out of debt and staying out of debt we’ll tackle the issue of paying off your debts.

Get Out of Debt Discussion

  • What tactics have you found to be helpful in stopping new debts from accumulating?
  • Have you successfully or unsuccessfully negotiated with a card company? What worked or didn’t?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • G.E. Miller says:

    @ debtguide – leave one in a drawer for an emergency, I like that advice. Takes discipline (maybe a combination lock on that drawer would be handy as well).

  • stephanie says:

    For those who need help not using credit cards, I’ve read advice to literally freeze your credit cards – put them in a glass of water in the freezer. Then when you want to use them, they are easy to get to, but hopefully by the time the ice melts you will have re-thought your purchasing decision. Can’t say how effective it is, as I’ve never tried it, but the idea makes me smile!

  • Dan (2) says:

    I was shooting the breeze with a car dealer and he said he often gives car loans to people with bad credit at a rate of 25%!

  • G.E. Miller says:

    @ Dan – That’s murder. Nobody should need a vehicle bad enough to the point of paying more than even 10%. 25%? Insane!

  • Matt says:

    A radical thought but should creditors be forced to put people they know are in serious debt in touch with trusted debt advice organisations?

    They won’t volunteer but perhaps they should be made.

  • Dave says:

    b. I tried to negotiate with Egg last year.

    I couldn’t afford to pay my minimum payment so I contacted them and asked them if they have a Financial Difficulties Department as I am struggling to make my payments. Keeping in mind I have never missed a payment, I told them I am really struggling at the moment and could I possibly skip this month and pay more next month, They said they didn’t have a Financial Difficulties Department and blatently refused any help! Pissed off, I thought if I cant afford it there is nothing I can do, so I didnt pay for 2 months. After numerous letters they called me up and I asked why I havent paid, I told them I had previously asked them for help but they refused and the woman said she would refer me to the Financial Difficulties Department!!! I was thinking “That didn’t exist last time I spoke to you!”

  • jimma says:

    If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.

  • Gregory Pennington says:

    Isn’t it interesting just how many types of debt there are? ‘Good Debt’ is not a term we hear very much at the moment…

    Also, thank you for all the spreadsheets. I’m sure they will be very useful to a lot of visitors.

  • Kensington Finance says:

    The discussion topics are very apt in the current economic climate. Some useful suggestions on managing your debt more effectively in order to reduce the premium rates associated with such loans.

  • Joseph Ross says:

    Yes everyone can use some good information like yours, on how to become debt free in these bad times. I think the more information that you have on the subject of getting your financial life back on track the better off you will be. I came across a website that I think everyone who is looking for solutions to their budget problems will find this website very helpful. It will give you a lot of needed financial solutions.

  • Neil says:


    Great post. It’s so true that until you get your budget worked out it’s pointless trying to sort out your debt problems. So many posts on debt miss out this important fact.


  • Thomas says:

    This is definitely the effected way. If we stop to spend our money on the non-use items. We will have a good cash flow every month.

  • Pete Loans says:

    The very first thing to do to stop collecting debts is to control one’s self. People have this tendency to buy things which they don’t actually need. and by using credit cards, it can be accessed easily. They don’t seem to realize that they are actually “collecting” things which are not that important. and this leads to the collection of debts.
    This article is very helpful I hope someone would put the psychological aspect of gaining debt. 🙂

  • says:

    Hey there, Great budgeting tools! I wish I was as wise as you seem to be when I was in my 20’s… I was still having a great old time racking-up debt lol. It feels good to be done with that now!

  • Kelsey says:


    I enjoyed reading the part about trying to lower your credit card rate, I think I may just have to give that a try..

    I have been contributing a measly 1% of my income to a 401k for a couple years now, and that combined with my employers profit sharing, I’ve gotten a little nest egg there. I recently took a loan out of the 401k to pay off my credit card. I found this to be extremely useful as it was instant gratification, and the 401k loan is short term, and gets deducted weekly out of my paycheck.
    I know that this technique is frowned upon, but at the young age of 23, I hardly think my $2500 loan is going to cause me to starve when I retire… I have figured out that I have saved 535 dollars over the 6 months, with my interest paid on the credit card over 6 months being 600, and the fee and interest on the 401k loan being just 65 for the 6 months.


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