Managing Debt

Even if you're financially responsible, life's unpredictable nature can sometimes catch you off guard, at times making it dangerously easy to fall into debt. If that happens, these tools and tips can help you manage that debt.

While being in debt is never ideal, some types of debt are better than others, and debt is sometimes broken up into “good debt” and “bad debt.”

“Good Debt” is debt that is an investment back into yourself or that increases the value of what you own. That could include student debt, a mortgage, or other investments.

"Bad Debt” is when you borrow for something that you’re losing money on. This could include things like credit card purchases for clothes or food and payday loans. Because of how quick cars lose value, auto loans often walk the line between “good” and “bad” debt.

That being said, even if your debt is technically “good,” that doesn’t mean it won’t still end up hurting you if you become unable to make your payments.

There are strategies to help you get back in control if you find yourself overwhelmed with debt payments (and even if you’re not overwhelmed, per say, these will still help you pay off your debt faster).

• Debt Snowball Method: With this method, you start small and work your way up. Begin by focusing on paying off your smallest debt first. Then, take the amount you were paying for that debt and pay it toward the next smallest debt, and so on until everything is paid off.
• Debt Avalanche Method: Just like an avalanche, you knock out the big things first and then work your way down. Focus on paying off your highest interest rate first, then roll those funds into the next highest, and then the next.
• Debt Management Plan: This is a plan set up by a non-profit or credit counseling agency to help you pay off your debts. Your counselor negotiates and handles everything with your lenders, often helping you get a lower interest rate or waiving fees. Once it’s set up, you only need to make a single payment to the agency, they handle the rest.
• Debt Consolidation: Debt consolidation allows you to combine all of your debts into one payment by taking out a new loan, ideally with a lower interest rate, and using it to pay off your debts. Be careful though, sometimes you could end up being in debt longer because of the new loan and thus paying more interest overall.

Beyond the major strategies, there are other adjustments that you can make to your approach to debt and daily spending habits that make a large impact when it comes to paying down debt.

• Pay More Than Your Minimum Balance: Adding even just a little bit of extra money to your monthly payment helps you pay off your debt sooner and pay less overall.
• Reduce Expenses: The simplest thing you can do is stop spending on anything that isn't essential. Since debt doesn't go away by itself, the money you save by cutting out non-essential expenses can go toward eliminating your debt.

• Negotiate With Your Creditors: If you can’t afford your minimum payment, you can ask your creditors to rewrite the terms of your credit agreements so that your bills are easier to pay off. This often means making smaller payments over a longer period of time, which does mean that you'll end up paying more interest and therefore increasing the overall cost of resolving debt. But that's usually a better solution in the long run than having to default or declare bankruptcy.
• Use Debt Counseling Services: If you need help dealing with your creditors or figuring out the best way to handle your debts, a non-profit credit counseling service may help. For a relatively modest charge, they'll work with you to come up with a feasible repayment plan. You can also use the Banzai Debt Coach to make a plan.