How to Break the Debt Trap

Find tips on everything from debt consolidation to assistance programs. There are real steps you can take to get control of debt today!


Debt seems like a constant part of our lives. We all fear it, but almost all of us have it, and many of us feel like it controls our lives. If you graduated with a mass of student loan debt, it might feel like you've never been free! If everyone around you is in debt, it's easy to start treating that as your natural state. It's not. Freedom is possible, and it's one of the most effective ways to build a sound financial future.

Not all borrowing is bad. Student loan debt can be a critical investment in your future, and a mortgage can be a way to stop throwing money down the black hole of monthly rent and start building equity in a tangible asset. That doesn't mean all borrowing is good: if you're overusing a credit card to get from paycheck to paycheck or resorting to high-interest "payday loans" on a regular basis, you have a problem, and it is time to make changes.

Credit and debt are two sides of the same coin: when you use credit, you get debt. You need good credit to access low-interest rates, which keep payments manageable. Credit cards are the most debilitating because of their high-interest rates, but that doesn't mean your other loans don't matter. As many waitresses with degrees will tell you, life doesn't always turn out the way you plan. Even justifiable and relatively low-interest borrowing can break a budget.

Here are some practical tips to help you take control of what you owe.

Build Good Credit

Whether you're just starting out or trying to dig your way out of a hole, you need to get organized. The best way to build credit is to use it responsibly, and then make your payments on time. Know what bills you have and when they're due. Make sure you make every single payment on time. If you're struggling, consider starting with a secured card. You pre-pay the card, and every payment goes toward building a positive record.


Keep a Budget

The first step is creating a budget. You may be surprised by what you find. Hopefully, you will discover that all those tiny visits to Starbucks and Circle K and all those dollars spent eating lunch out are the sources of all your financial woes. If that's the case, cutting back will be easy.

In some cases, you may find that your bills are simply higher than your earnings. If this is true, it doesn't matter how frugal you are; you will still find yourself under water. This is when things get tough. You need to balance this budget. Be creative, but also accept that you might have to make some drastic changes. Do you have enough equity in your car to sell it and buy a less expensive model outright? Can you move to a less expensive part of town? Nothing in your budget is set in stone. Look at where you can afford to be more frugal and make the hard choices to manage your money. If you really can't make any cuts, it may be time to look into getting a second job.

Avoid Leaving a Monthly Balance on Your Cards

The average American household owes over $15,000 on credit cards alone.[1] At interest rates that average 15 percent, many households are paying over $2000 in interest each year. Some are paying much more. That's a pretty serious payout for the privilege of borrowing money.

You can manage cards responsibly, but their issuers are betting against you. Your mistakes are their profits, and profits are high. The key to this is to pay them off in full each month. If you are not able to do this consistently, you need to go back and take a closer look at your budget.

Consider Debt Consolidation, but Be Careful

Debt consolidation is, in simple terms, taking out one loan to pay back many, and having only one payment to make after that. Some people sell consolidation as a solution, and if the interest on the consolidated loan is substantially lower than the interest on the loans you paid off, it can help. It does not address the problems that got you into trouble in the first place, and some people that consolidate end up just taking on more loans. If you have an opportunity to consolidate high-interests credit card debt with a lower-interest loan, it's worth considering, but you'll want to be very careful with your cards until you've paid that loan off. Remember that debt consolidation is part of your reduction strategy, not the whole thing!

Prioritize According to Interest Rate

If yours is like the average household, the ship has already sailed. Credit card debt is here, and it is destroying your budget. In this case, paying off debt needs to be a top priority. Depending on the severity of your bottom line, it probably isn't worth moving or selling your car. It may, however, be worth taking on a temporary part-time job until your affairs are in order. Get the calculator out and do some math. Set a goal, and see what kind of monthly payment you need to be making to hit your goal. Put it into the budget and work from there. Don't be too hard on yourself. It may take longer than you had hoped, but as long as you're on the right path, you're doing a great job.


The interest rates on your other loans may surprise you, especially if you have private student loan debt. Once you've paid off your most outrageously high-interest loans, move down the line. Eventually, you'll get through it all. For most of us, the process is a marathon, not a sprint.

Look into Assistance Programs: Student Loans, Back Taxes, and More

There are programs specifically built to help people who owe too much.

Student Loans - Paying back your loans on an income-based repayment plan for twenty-five years will lead to their forgiveness.[2] Once you've enrolled in an affiliated payment plan, even a payment of $0 works towards this program. The hope is that you will eventually have enough money to pay back the loan in full, but these plans ensure that the monthly payments won't kill you and even promise your eventual release from payment. Teachers and some non-profit workers are eligible for faster forgiveness.

Taxes - If you've found yourself overwhelmed by unpaid taxes, the IRS Fresh Start Program can help.[3] It is a one-time deal, but once accepted the IRS will forgive many of the fees associated with your bill. You can also take advantage of Offers in Compromise. If the IRS thinks you're offering the most you can pay, they'll let you off the hook for additional back taxes.

If you're in over your head, the very first thing to do is contact your creditors. If they sell your account to a collection agency, they aren't going to get the full amount, so they are interested in working with you. Many companies have internal hardship programs.[4] See if they'll accept a settlement payment or set up a manageable payment plan with a lower interest rate. Be careful if you're considering using a third-party to help you, as there are many scam companies that promise big and deliver small.

Consider Counseling

Professional credit counseling is widely available, often without charge. Many relief programs require counseling, but even if you aren't going into a formal program, it can be well worth the effort and time. You'll get practical expert advice on managing your situation, and seeking counseling on your initiative will prove to your creditors that you are taking your situation seriously and that you deserve a better deal.

Filing for Bankruptcy Will Not Ruin Your Life

Filing for bankruptcy is a last resort - there are consequences, and it isn't something that anyone wants to do, but it is not the end of the world. Bankruptcy isn't as scary as it sounds. It just means that your assets will be liquidated to pay off as many of your creditors as possible. If you don't have any assets, there's nothing to liquidate. Then you get to start over. Your credit will be ruined, but your life won't be. Note, however, that student loans will usually stick with you even through bankruptcy. If you are considering this option, it is important to do your research, seek professional advice, and fully understand what you are getting into.


Escape from constant payments may seem an impossible task, and it's easy to put off thinking about it until tomorrow, or somewhere in the future. That's not going to help. Getting out of debt is possible, and people do it every day, but it doesn't happen overnight. The sooner you start, the sooner you'll finish. Take charge of your financial life, it's not easy, but it's worth it!