Debt has become a common part of the American financial experience, but it continues to limit choices, create stress, and impact overall financial wellness. The good news is that becoming debt-free is absolutely possible. With the right understanding of how debt works and a clear plan for managing it, anyone can make meaningful progress toward financial stability.

In this month’s Real Secrets of Money session, we provided a practical, accessible breakdown of credit, loans, repayment strategies, and mindset shifts that help accelerate your journey toward debt freedom. This recap expands on those insights, offering a polished, step-by-step guide to help you understand your debt and begin building a stronger financial future. Click here to watch the full replay.

What It Really Means to Get Out of Debt

Getting out of debt is more than making monthly payments. It requires awareness, intentional behavior changes, and a long-term plan that matches your goals. To make sustainable progress, you need to understand your debt-to-income ratio, the difference between good and bad debt, how repayment methods work, the impact of credit behavior, and how the cost of money influences borrowing decisions. Once you understand these concepts, the path forward becomes much clearer.

Understanding Your Debt-to-Income Ratio

Your debt-to-income ratio, called DTI, is one of the most important indicators of financial health. Lenders use it to determine your borrowing risk, and it directly impacts the interest rates you qualify for.

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What Is Considered a Good DTI

• Ideal: below 20 percent
• Acceptable: below 36 percent
• High risk: 36 percent or higher

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A high DTI makes it difficult to get approved for loans or refinancing options. A low DTI improves financial stability and borrowing power.

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How to Calculate DTI

Divide your total monthly debt payments by your gross monthly income, then multiply by 100.

Knowing this number gives you clarity on how aggressively you need to reduce your debt.

Good Debt vs Bad Debt

Although debt often carries a negative reputation, not all debt is harmful. Certain types of debt can genuinely support long-term financial growth. Good debt usually has a low interest rate, holds or gains value, or creates income. Mortgages, strategic business loans, and some student loans fall into this category.

Bad debt, on the other hand, generally involves high interest, depreciating assets, or recurring costs that drain cash flow. Credit cards, high-interest personal loans, and long-term car loans are common examples. Understanding the difference helps you prioritize what to pay off first and what may be worth keeping for strategic financial reasons.

How to Get Out of Credit Card Debt

Credit card debt is both common and costly. Despite being designed originally for short-term use, more than half of Americans carry credit card balances from month to month. High interest rates then push the debt higher, making it harder to escape the cycle.

The path to paying down credit card debt starts with consistency. Making payments before the due date, paying more than the minimum, and setting up automatic payments can help prevent late fees and additional interest. Breaking your payment into smaller amounts throughout the month can also ease cash-flow pressure. If used wisely, a zero-percent balance transfer card may offer temporary relief, but only if paired with a realistic payoff plan. At the same time, building an emergency fund reduces the likelihood of relying on credit cards when unexpected expenses appear.

When credit card debt is ignored, the consequences become serious. Missed payments can remain on your credit report for seven years. Penalty interest can compound faster than you can keep up. Accounts may be sold to collections, and legal action is possible. That is why it is essential to take action quickly and consistently, even if progress feels slow at first.

Avalanche and Snowball Methods for Paying Off Debt

Two of the most effective repayment strategies are the avalanche method and the snowball method.

The avalanche method focuses on paying off the debt with the highest interest rate first while continuing to make minimum payments on the rest. This approach minimizes the total interest you pay and often results in a faster payoff overall. It is a smart strategy for people who are disciplined and motivated by financial efficiency rather than quick wins.

The snowball method takes the opposite approach, starting with the smallest balance rather than the highest interest rate. Eliminating a small balance quickly creates a sense of momentum and accomplishment, which can be especially helpful for people who benefit from visible progress. While this method may cost slightly more in interest, the emotional boost often leads to stronger long-term results.

Car Loan Debt: One of the Most Overlooked Financial Risks

Car loans create financial strain more often than people realize.

Key Insights

• Cars lose 20 to 30% of value in the first year
• Long loan terms create a high risk of being upside down
• Dealership financing is a profit center
• Credit unions often offer better rates
• Biweekly payments reduce stress on monthly cash flow

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When evaluating car debt, consider refinancing options, shorter terms, or waiting until you can put more money down to avoid negative equity.

Managing Student Loan Debt

Student loans can feel overwhelming, but with the right plan, they can be managed responsibly and strategically. Last month’s Real Secrets of Money session focused on college funding and student debt in greater detail. If you missed it, CLICK HERE for a deeper understanding of loan types, funding sources, and long-term planning.

This month's session highlighted a few key strategies to stay in control after loans are in place:

• Begin paying interest while still in school, when possible, to keep balances from growing.
• Understand the difference between deferment and forbearance, especially how interest accrues under each option.
• Explore federal forgiveness programs and evaluate refinancing options if your payment history and credit allow it.
• Stay in communication with your servicer to avoid missed deadlines or overlooked opportunities.

Defaulting on student loans can lead to wage garnishment, withheld tax refunds, and long-term credit damage. Staying proactive and informed is the best way to prevent these outcomes and keep your financial future on track.

Understanding the Cost of Money

The cost of money refers to the true price of borrowing compared to what your money could earn if invested or saved elsewhere.

For example:

• Car loan interest rate: 3.9 percent
• High yield savings interest rate: 4.8 percent

You earn more by keeping cash saved at a higher rate than using it as a loan down payment. This concept helps you decide when borrowing makes sense and when saving does.

How to Become Debt Free: Five Steps That Work

These are the steps that create real results.

1. Create a Personalized Budget

You must choose a budgeting method that fits your money mindset. This will be covered extensively in next month's workshop.

2. Stop Adding New Debt

Credit cards are not extra spending power; they represent future payments.

3. Build an Emergency Fund

Aim for three to six months of expenses. Consider a no fee high yield savings account.

4. Use a Structured Payoff Strategy

Choose the avalanche or snowball method and commit to it.

5. Celebrate Every Win

Progress builds confidence and momentum.

Final Thoughts: Yes, You Can Get Out of Debt

Getting out of debt is not about sacrifice or restriction. It is about clarity, strategy, and building control over your financial decisions.

You have options. You have tools. And you have the ability to change your entire relationship with money.

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Reach out for a no obligation discovery call to learn how these concepts and other financial strategies fit your personal situation.