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5 steps to get out of debt

Mark Bristow avatar
Mark Bristow
- 5 min read
5 steps to get out of debt

While a certain level of carefully-managed debt can help us make progress towards our financial goals, it’s easy for debts, fees and interest charges to grow larger than we can easily manage.

If you’re struggling with debt and don’t know where to start when it comes to getting your finances back under control, here are five steps you can potentially follow:

Step 1 – Get organised and make a plan

There are several questions you should ask yourself when making a plan to get out of debt:

  • What debts do you owe?
  • Who do you owe them to?
  • How do you owe on each debt?
  • How much are the monthly repayments?
  • What are their interest rates?
  • What are their due dates?

Once you have a better idea of your overall debt situation, you can prioritise which debts to focus on clearing first.

Step 2 – Focus on your smallest debts OR your debts with the highest interest rates

Trying to pay off multiple debts at once can prove both difficult and expensive. Depending on your financial situation, you may want to consider focusing on paying off one debt at a time, and only paying the minimum amount required to service your other debts. The question is, which debt should you concentrate on clearing first?  

One possible strategy is to put the lion’s share of your available budget towards clearing the debts with the smallest balances owing first. These relatively easy wins let you make clear progress towards your goal of becoming debt-free, and give you a valuable psychological boost that encourages you to stick to your commitment.  Also, every debt you fully clear is one payment to budget for, and one less set of fees and interest charges. The funds that once went towards servicing these small debts can then be put towards tackling your bigger, nastier debts.

A second possible strategy is to focus on paying back whichever of your debts has the highest interest rate. The longer you take to repay any loan, the more repayments you’ll have to make, and every repayment means another interest charge. By prioritising clearing your high-interest debts first, you may save more money in interest charges in the long run than paying off your smaller debts first. 

The ideal strategy for clearing your debts will depend on your situation, as well as your household’s personal finances. Make some calculations and use your best judgement to make a plan, and be prepared to stick to it.

Step 3 – Talk to your creditors

Nobody wants to see a borrower default on their loan, including the lender. If you’re struggling to afford your repayments, it may be worth talking to your creditors and being upfront about your current situation, rather than risking missed repayments that could leave you in serious financial strife.

Your lender may be willing to make some concessions to help you manage your debt situation, such as offering a repayment holiday or allowing you to refinance onto a more affordable interest rate.

However, your lender will need you to pay back what you owe sooner or later. If you are offered some debt relief, don’t use it as an excuse to relax and rest on your laurels, but refocus on clearing your balance owing as quickly and efficiently as possible.

Step 4 – Consider debt consolidation

If you owe money to multiple creditors, it’s worth considering whether consolidating your many smaller debts into one larger debt will leave you in a better financial position.

A debt consolidation loan is a type of personal loan where you borrow a lump sum of money that is used to fully pay off and clear your other existing debts. This leaves you with just one loan to manage, with one repayment each month, one interest charge at the one rate, and one set of fees to pay. This can greatly simplify your household budgeting, and potentially make your monthly repayments more affordable.

It’s important to note that a debt consolidation loan could ultimately cost you more in total interest than paying off your debts separately. This is because debt consolidation loans often stretch out your repayments over a term of 12 months or more. While you’ll make a larger number of smaller repayments, you’ll be charged interest on each of these repayments. In some cases, you may pay less in total interest by clearing your debts separately over a shorter period of time, even if the repayments are less immediately affordable.   

It’s also important to note that once you’ve cleared your old debts with the help of a debt consolidation loan, that doesn’t mean you can go out and run up new debts! Resist the temptation to go shopping with your now-cleared credit cards, and focus on your mission to become debt-free.

Step 5 – Get help when you need it

Getting out of debt isn’t easy or fun. It’s hard work, and can be a real struggle for borrowers in financial hardship.

Don’t be afraid to ask for help from professionals, such as accountants and financial advisers. If you don’t think you could afford their fees, the Australian government has free financial counselling services available, along with their National Debt Helpline – 1800 007 007.


This article is over two years old, last updated on November 8, 2017. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent personal loans articles.

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