A Guide to Managing Debt

A young couple sitting in their new house.

Key Takeaways

  • Understand the difference between "good" debt that can support investments like education and "bad" debt from credit cards and loans used for consumption. Focus on paying down high-interest "bad" debt first.
  • Create a budget to free up more money to pay down debt. Look for ways to cut discretionary spending.
  • Make a debt repayment plan. Consider strategies like the "avalanche" or "snowball" methods to determine payment priority.
  • Explore options like debt consolidation loans or refinancing, but understand the risks before pursuing. Nonprofit credit counseling may be a safer alternative.
  • If debt feels overwhelming, reputable credit counseling agencies can provide guidance on managing a debt repayment plan. Bankruptcy should be a last resort due to severe credit score impacts.

At some point in your life, you've likely borrowed money to support yourself, pay for an education or buy a home. But managing debt when it becomes large, or comes from multiple sources, can create a serious strain on your well-being. That's when it becomes vital to engage in debt management. A strategic approach can help you take control of your finances with the goal of eventually becoming debt free.

This guide offers practical tips and insights for borrowers, from creating a budget and negotiating with creditors to consolidating loans and exploring debt relief options. Whether you're facing credit card balances, student loans or other types of debt, you'll learn to develop a plan to get back on track toward financial self-sufficiency.

Understanding Types of Debt

The word "debt" might instantly elicit negative feelings. Still, not all borrowing is bad. When you borrow to pursue a college degree or start a new business, for example, those loans likely represent an investment in your future earning ability.

Debt that you accumulate solely to meet present needs or wants can have the opposite effect. Living under the burden of such balances can make it harder to not only manage your other bills, but to save for your long-term goals. Among the most detrimental are credit cards and other unsecured debts. Typically they charge higher interest rates because they don't require you to put down collateral the lender can access if you fail to make your payments.

Understanding the difference between "good" and "bad" debts helps you make smarter borrowing decisions. It also helps you prioritize your payments, so you're putting your money to use wisely given your situation.

Assessing Your Financial Situation

When you're trying to manage debt, the first step is to perform a thorough review of your financial picture. That includes having a clear understanding of your outstanding debts. Gather recent statements that show your balance from credit cards, student loans, personal loans, mortgages and any other borrowing. 

With that information at your fingertips, you can make better decisions about which debts to pay off first. One popular option is to pay off the debt with the highest interest rate first. Sometimes known as the "avalanche" method, this strategy may be effective because it helps minimize your total finance charges.

Conversely, you could choose to start with the lowest balance, otherwise known as "snowball" method. While you'll typically save money over the long-term by paying back debt with the highest interest rate first, you might feel more progress at the start by paying off that first debt completely.

Whichever approach you take, consider contacting your creditors and requesting a reduced interest rate. If this feels a bit nerve-wracking, write out a script and have your notes on hand to help answer questions. The worst outcome is that they simply say no. But if you're able to get your rate down, you'll be able to pay off your debt quicker than you would otherwise. Our free debt calculator can help you better understand your financial situation and simplify assessing your debt so you can work towards financial well-being.

Creating a Debt Management Plan

Once you have a good picture of how much you owe and what interest rates you're paying, you can start creating a debt management plan. Your strategy may involve:

  • Creating a budget: A budget can help free up more of your income to put toward your debt. Cut back on any unnecessary memberships and subscriptions. Set a monthly cap on discretionary expenses such as dining out and buying clothes.
  • Determining payment amounts: Whether you choose the avalanche method or snowball method of repayment, start by determining your payment amounts. Loans and revolving credit lines have minimum payments that you'll want to make in order to help preserve your credit score and, in the case of secured debts, help prevent repossession of your assets. Consider paying more than the minimum on credit cards and high-interest loans to help get you out of debt faster.
  • Automating your debt payments: This can help you stay on track. You can set up electronic drafts from your bank account to your credit accounts each payday. That way, you're not tempted to spend money that would otherwise go toward debt management.
  • Tracking your progress: Tracking your progress helps you stay motivated. Consider maintaining a spreadsheet that shows your balances from month to month. Or sign up for a budgeting app that automatically puts your credit balances on a single screen. Seeing those amounts decline over time will give you a more tangible sense of the your progress.

Reducing high-interest debt is critical to your long-term financial health. But does that mean paying down every loan as quickly as possible is your best move? When it comes to lower-cost forms of borrowing, including mortgages and student loans, you may want to consider investing any extra money each month rather than accelerating your debt repayment. A debt calculator can help you assess your unique circumstances and help provide recommendations on the more sensible course of action.

Choosing what to do with your "good" debt isn't simply a matter of dollars and cents, however. If getting rid of your loan balances faster alleviates emotional stress for you, doing so might be your better course of action. That's even if the return from investing that money would likely exceed the annual percentage rate (APR) you're paying.

Debt Consolidation: Is It a Good Choice for You?

It can be stressful when your interest rates are high or your total payments become difficult to handle. Debt consolidation, which involves rolling multiple debts into one loan, may be an option.

Debt consolidation can take a number of forms, including:

  • Credit card transfers: This involves applying for a new card that has a better rate and then transferring your existing card balances. Because you're not paying as much interest, you likely can pay off your principal more quickly. For this method to be effective, however, you have to avoid using the new credit line to make additional purchases. Otherwise, you could end up making your debt problem even worse.
  • Debt consolidation loans: These are typically fixed-rate loans, available through traditional banks and online lenders, intended to pay off previous debts. You may be able to reduce your monthly payments through either a lower interest rate or a longer repayment term. In order to qualify for a competitive rate, however, you generally need a strong credit score.
  • Student loan consolidation: If you have multiple federal student loans, you can roll them into a single consolidation loan. You may be able to lower your monthly payment by choosing an income-driven repayment plan or by selecting a plan that increases your repayment period. Keep in mind, consolidating loans could result in the loss of certain borrower benefits, including interest rate discounts and principal rebates, so you should talk with your loan servicer before applying.

Is Refinancing Your Debt an Option?

Depending on the type of debt you owe, refinancing that debt into a new loan with lower interest rates or longer repayment periods may be a path worth considering. Whether this makes sense often depends however on economic conditions and other factors.

Refinancing is particularly popular with homeowners. They may see savings when interest rates in general have dropped or they've improved their credit and now qualify for more favorable terms. You incur closing costs when you take out a new mortgage, so this option may make more sense if you plan to live in your home for at least several more years.

Home loans aren't the only ones that you may want to consider replacing, however. For instance, if interest rates have fallen and you're paying back student loans, you may want to see if private lenders are willing to refinance your debt at a lower cost. If you have several years of repayment left, you may find that refinancing saves you a significant amount of interest over the life of the loan.

There is a potential drawback, however. When you refinance a federal loan, you lose certain borrower protections and forgiveness programs that are only available with government-backed loans. So it's crucial to weigh the potential benefits and drawbacks carefully before opting for a lower APR.

Exploring Debt Management Solutions

Managing debt on your own can be a stressful experience. That's exactly why many borrowers look for outside support. It's important to realize, however, that not all organizations that offer to help with your debt are created equal. Knowing the type of organization you're dealing with may help you avoid unnecessary stress later.

Credit Counseling

You may want to start by looking at credit counseling agencies. These are usually nonprofit entities that help you create a budget and develop a debt management plan (DMP). Under a DMP, you make one monthly payment to the agency, which in turn pays your various creditors. Often, credit counseling agencies can lower your monthly payment by extending your repayment period or negotiating for lower interest rates. Most agencies charge a monthly fee, which they may take out of your monthly payment.

To ensure you're working with a trustworthy organization, consider looking for agencies that are members of the National Foundation for Credit Counseling. You can also look at the business's rating from the Better Business Bureau and search online reviews to see what other clients have to say.

Debt Settlement

A debt management plan shouldn't be confused with a debt settlement companies, which negotiate with lenders to reduce the amount you actually owe. While that may sound like appealing, it's a course of action that carries certain risks, too. For example, debt settlement firms usually encourage you to stop making payments to your lenders in order to improve their negotiating position. But when this happens, you may rack up late fees and other charges. Plus, your lender may pursue more aggressive collection activities. That's why negotiating with your lenders directly, or engaging a nonprofit credit counseling agency, is typically preferable.


When making your monthly payments becomes impossible, you may have to consider bankruptcy proceedings. The bankruptcy process allows the court to discard certain debts or create a more feasible repayment plan. The downside: expect a large hit to your credit score. You may be denied credit or have to pay higher interest rates for several years afterward. A reputable bankruptcy attorney can talk you through the process and help you decide whether pursuing relief in this way is a good option.

Tips for Maintaining Financial Health

Getting your finances in order can go a long way toward improving your emotional well-being. Having a plan to systematically reduce your debt burden — and especially high-interest accounts — is an important part of that process.

Consider taking these simple steps to get your finances back on track:

  • Gather the most current statement for each credit account you have so you better understand your overall debt level.
  • Commit to a debt-reduction strategy that prioritizes the accounts you want to pay off first.
  • Create a monthly budget that allows you to reign in your discretionary expenses and helps prevent you from taking on more "bad" debt.
  • Seek the help of a reputable credit counseling agency if you feel overwhelmed or are having trouble making progress on your own.

Regaining Financial Freedom

Debt can be a daunting and seemingly overwhelming burden to manage, but it doesn't have to be so. With the right strategies and tools, it's possible to take back control of your finances and pursue the goals that really matter to you.

Start today be making a thorough assessment of your debt and choosing which accounts to pay down first. Create a budget that minimizes spending on non-essential purchases so you have more money to allocate toward debt-reduction. The more diligent you are about sticking to your debt-reduction plan, the more successful you'll be in regaining financial freedom.

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