How to get out of debt and how to deal with debt collectors

Debt is crippling and once you have some, it can be hard to pay it off and get back on track financially, especially if you are reliant on Centrelink.

When I was a kid, my dad was a debt collector, so he has offered some tips. I have spoken to a few others about dealing with debt collectors and helped various people pay off exteme amounts of debt.

Tips to pay off debt:

1.) Know how much you owe

Don’t bury your head in the sand and deny how much you owe, it only makes it worse. Write down all your debts with their full amount, interest rate and how long they have left to pay off. In the case of interest free loans, write down when the interest free period expires because once that hits, the interest is intense.

Also, make a note if any have massive fees for paying them off early, as you will need to factor them into your payment plan.

This should be part of your budget, but many miss it. (For tips on creating and sticking to a budget, check out this post).

2.) Prioritise your debts

How you pay off your debt is up to you. Some people prefer to start with the smallest debt first and psychologically this works. It makes you feel you are paying off your debt faster when you clear a small one. Dave Ramsey recommends doing it this way.

Financially, it is better to pay off the debt with the highest interest first. Sometimes those debts are so huge it feels like you will never pay them off though. If you are disciplined and can pay them off despite it possibly taking longer to clear your first debt, you may save more interest this way (depending on the interest with your debts).

3.) Debt snowball

Once a debt is paid off, put all the money you were throwing at that debt onto the next debt. Both it’s monthly repayment and any extra you put on it. You pay off your debt much faster this way. Once your second debt is clear put all the money onto your third debt and so on.

Keep making minimum repayments on all your debt, but select one debt to be the one you put any extra money on to get rid of it quickly.

Resist the temptation to splurge or treat yourself once the first debt is clear if you have more to pay off. Focus on getting the debt clear.

4.) Find ways to make extra money

Chances are you’re in debt because you couldn’t afford things, then it got out of control. Many people struggle to make ends meet, let alone pay off debt.

To pay it off, you need to find ways to make more money. I have a few articles on my other site, The Thrifty Issue which might help:
51 ways to make money from home
10 ways to make $10,000
10 ways to make $1,000 this month

5.) Reduce credit limits

As you pay off your debt, you can request the credit limit be reduced. For instance, say you have a $5,000 credit card. Once you pay off $500 you can request to drop the limit to $4,500 and do this until with each step until the credit card is gone.

By reducing the limit, you can’t spend on it again.

Be aware, opening and closing credit cards and other debt will impact on your credit score and borrowing capacity. I still recommend living debt free though. You can check your credit score for free and track it monthly with sites such as

Why care about your credit score? Every application for credit such as a loan or credit card goes on your file. Any bank or company lending you money checks your score and will offer an interest rate based on the credit score. A good score gets you a better rate. A bad score means a higher rate. Each application lowers your score, makes it less likely to get approved and makes it harder to get credit.

6.) Negotiate

Start with your current lender. Asks for a better deal such as reduced interest, no bank fees or similar. Do some research and start comparing providers, then if needed, switch. Be aware though, this will impact your credit score, which in turn impacts your interest rate. Check before applying how likely you are to get the loan and what a likely interest rate is. If you cannot switch, don’t apply.

7.) Save in every area possible

Go over your budget and look at every area you can make cuts, then start transferring those savings onto your debt. For tips on ways to save money, I have 31 ways to save $200 or more here, plus loads of saving articles here.

8.) Save an emergency fund

Dave Ramsey recommends $1,000. Personally, I have usually needed $2,000 in an emergency. This can be difficult to save when trying to pay off debt at the same time. Try to save this emergency fund first before smashing the debt. This way, when you pay down the debt if an emergency happens, you don’t need to put it back on the credit card. It helps break the debt cycle and the mentality that you need a credit card.

9.) Change your thinking

Debt is not essential. Many think you cannot live without a credit card or personal, but you can and you will feel so much better for it. Get used to spending with your own money instead of borrowing money.

Check out 6 ways to easily reduce debt.

How to deal with debt collectors

If you can negotiate with the people or bank you owe money to before it goes to debt collectors, it is better for everyone. People and companies just want to know they are getting their money back. Work out a payment plan, do not miss payments and do everything you can to show you want to pay the debt off and will. Ask to go to the financial hardship section of the bank if you need and get a brief pause or do whatever is needed to ease up the finances temporarily before it ends up with debt collectors. Your interest will continue to accrue but you will be helped.

If it ends up with debt collectors, here are a few tips.

1.) Get all your paperwork in order

Have all your debt paperwork in one file which is easy to access so you can see at a glance what the terms and conditions are, what can be expected and how much you owe.

2.) Talk to them

Don’t avoid the phone calls. You need to get is sorted and if you ignore it, it will get worse. Debt collectors try to catch you off guard, so when they call, ask for a moment to get your paperwork together or request to call them back (or have them call you) at a specific time when you are available and ready to discuss it with them. Do not do this then avoid the call. You must take it. They will push to get their answers and an immediate payment on the spot. Be calm, clear and keep repeating you will discuss it when you have your paperwork and are ready.

3.) Make a payment on the spot if you can

This is a gesture of goodwill and shows you are willing to pay. If you cannot afford what they push for, don’t agree to it. Agree only to what you can afford to pay. If you can afford to make a larger payment which is close to the total amount, you may be able to negotiate the payment down to the amount you have and get it cleared completely.

4.) Arrange a payment plan

A debt collector will push for the highest amount possible. Do not agree to it if you cannot afford it. If you can afford $20 be firm and say it will be $20 a week for as long as it takes. They can’t get blood from a stone and some money is better than no money.

5.) Get the amount reduced

As mentioned in tip 3, you may be able to get the total reduced. This is often offered when a debt has been outstanding for a long period or you are closer to the end of the debt. I have managed to knock thousands off debts for friends by offering the debt collector a lower amount in full today or asking what the lowest total they could pay would be if they paid in full today. This doesn’t always work and ultimately, you did accrue the debt, so should pay it in full. However, for them, most of the money is better than no money.

What tips do you have for dealing with debt?

You might also like these real stories of paying off debt
$3,000 debt cleared in 1 month!
How we cleared $90,000 (I know these guys personally and they started unemployed on their debt journey. But they prefer to remain anonymous).

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