Accumulating debt may seem like falling into a steep ravine and trying to climb out with nothing to hold on to. But there are some resources and methods you can arm yourself with to take control of (and pay off) your debt. Here's how to get started.
Before diving into how to deal with common kinds of debt, familiarize yourself the terminology used to categorize debt so that you know what you have:
Secured debt: utilizes a form of collateral, like a house or car
Unsecured debt: has no collateral, like credit cards or personal loans
Fixed interest rate debt: has the same interest rate for the entire timeline of the loan, like a mortgage
Variable interest rate debt: the interest rate may change over the life of the loan, like credit cards
Fixed payment term: the loan is set to be paid off by a certain date, like a mortgage or student loan
Variable repayment period: There is no set date by when the debt must be repaid, like credit cards
Deductible: this loan is used to better your personal situation and therefore may have tax benefits, like a mortgage or student loan
Non-deductible: a loan that is not used to purchase an appreciating asset or new skill, like credit cards or a personal loan
For more details on each of the above terms, check out this explainer from EY.
If you're dealing with debt collectors, make sure you know your rights under The Fair Debt Collection Practices Act. There are a lot of tactics they aren't allowed to use, like calling you at certain times. Check to see if your debt has a statute of limitations that allows the creditor to sue you for unpaid debt.
Credit Cards
As painful as it might be, take an inventory of all your credit card debt. Write down how much you owe plus your interest rate for each card. Contact each issuer and give them a detailed explanation of why you can't repay what you owe, then tell them what you can afford and ask them to agree to the lower amount (in writing). Nolo has some more information on how to successfully negotiate your credit card debt. You can also try to negotiate a lower interest on each of your credit cards. Even just lowering it one point can save you a lot over the time you take to pay off the debt.
Once you know how much you really need to repay, calculate how long it'll take you do so. Nerdwallet has a calculator that can help. This will help you set a goal timeline as well as break down your repayment amount for each month. Order your cards from highest interest rate to lowest, and then pay them off in that order. This is known as the "stack" method of debt repayment, and will save you the most money in the long run). Some financial gurus recommend using the snowball method, which pays the cards with the lowest amounts due first, since you cut down on your number of debts quicker, which boosts confidence and keeps you going—but it could end up costing you more in the long run.
Real Simple has a great tip on speeding up repayment:
If you're on a tight budget, go ahead and pay the minimum due each month, then try to make the same payment again two weeks later. Keep making a payment of the initial minimum-due amount twice a month until your debt is paid off. (To keep track, put a reminder on your calendar.)
This tactic aligns well if you get a paycheck every two weeks, because you can make each payment as soon as your paycheck lands in your account (no excuse to procrastinate!). If you don't get paid on a two week schedule, try setting aside enough from each paycheck to make the two minimum payments a month.
As you tackle paying off your credit card debt, you should be working to avoid racking up more. Take a serious look at your expenses, draw up a budget for yourself, and stick to it. If you need to, restrict yourself to paying only with cash until you know you can afford to always pay off your credit card balance in full every billing period.
Medical Bills
If you've ever been hospitalized, or even just visited the emergency room, you know that medical charges can add up quickly. Medical debt is difficult to deal with because you don't feel like you can really turn down the care, even if you may not be able to afford it. Your first step in managing your medical bills is to carefully check them for errors. Make sure you actually used all the services you're being charged for. All it takes is one wrong keystroke at the hospital and suddenly you're paying for something completely different from what you received.
Besides hunting down errors and pointing them out to the hospital, you can also try to negotiate your medical bills down.
If you feel overwhelmed by the process, NerdWallet suggests several resources you can use to get help with your medical debt:
Government programs like the Medicaid and Medicare Savings Programs
Charity care: Ask your local hospital if they provide care for those who can't afford to pay their medical bills. You'll likely need to show proof that you're unable to pay.
Crowdfunding: Sites like Giveforward allow you to raise money for bills by asking family and friends to donate.
In terms of repayment, Debt.org suggests that you try paying off other smaller debts, like credit cards, so that you free up more money for your medical bills.
Mortgage
Whether you recently took on a mortgage or if you've been paying one off for years, there are ways you can try to reduce it and save money. Putting in the effort to pay off your mortgage early is motivating because you'll gain more security for yourself and your family (no one can take your home away) as well as free up more cash to pay off other debts or increase your savings.
About.com has a few suggestions of how you can lower your mortgage payments:
Refinance your mortgage. Doing so can decrease the interest rate you're paying on your mortgage, saving you money overall. About.com recommends doing this if your mortgage is newer, since most most mortgages pay more in interest at the beginning, and more toward the principal at the end.
If you own 20% or more equity in your home, make sure you aren't paying for private mortgage insurance (PMI). Often, if you got the mortgage and didn't own 20% equity, you also end up paying for PMI. Ask the lender if they've removed this since you own 20% or more equity now.
Extend the timeline of your loan. This might sound counterintuitive, but it lowers the amount you must pay each month, which helps if you're ever low on funds. Of course, you can still stick to your original payment amount while on the lower plan, which will help pay it off faster.
Fight the tax assessment. Many mortgage payments include property taxes, which is determined by your county. Getting a new assessment could lower your property taxes if the home's value has decreased since the last assessment. If your home's value has increased your taxes could go up, so think carefully about this one before taking action.
As with other types of debt, make a plan to repay your mortgage as quickly as you can afford. Each time you get an increase in income—even if it is a short term, like a bonus or tax refund—consider applying it to your debts.
Student Loans
Unfortunately, education debt is becoming more and more common for young people. On the upside, there are more ways to reduce your student loans than other types of debt—including a public service forgiveness loan and volunteering in exchange for student loan repayment. You can also use the Education Department's repayment estimator tool to see how long it might take you to be free from student loan debt.
If you take a few steps to plan ahead, you can avoid future student loan debt. Try a few of these resources to help pay for future educational endeavors:
Scholarships: These are usually awarded based on financial need or academic achievements. Even if you apply for and are awarded several scholarships of smaller amounts, that's still money you don't have to go into debt for. You can find scholarships through search tools like Fastweb.
Grants: Very similar to scholarships, though often awarded through organizations or the government, like Federal Pell Grants.
Work-study programs: You work part-time at jobs arranged through the Federal Work-Study program and your earnings go towards paying education expenses.
Take time to work before going to college or graduate school so you can save money to soften the blow of borrowing funds.
Create passive sources of income so that you can afford to pay for at least part of your schooling
Defer your loans: Essentially, your situation (like being in the military, unemployed, etc.) doesn't allow you to be able to repay your loans at the moment. You can use this table to figure out if you qualify for student loan deferment.
Try income-based repayment: If your loan payment is a significant portion of your earnings, you may qualify for an income-based repayment program. Basically, the amount you pay is adjusted so that you don't spend the majority of your cash flow on student loans and don't have enough left to live on. You can find out more about the various plans and if you qualify on the federal student aid web site.
Student loans can be especially challenging because you may not have known what you were getting into when you took them on. Apply some of the previously mentioned tactics, such as budgeting to save more to put towards repayment or making multiple payments each month, to reduce your student loan debt ASAP.
When it comes to debt, you have a lot to think about and you may have a lot of work ahead of you. Before you declare bankruptcy or settle your debt, make sure you know the potential consequences on your future. You can always utilize resources like credit counselors or financial advisor.
Dealing with debt can be a stressful experience—from the share or guilt you may feel to the unpleasant interactions you may have with creditors. However, you can use the tips above to improve your situation and empower yourself financially.
Images by Tina Mailhot-Roberge, armydre2008, jjmontero, ndrwfgg, and julielindsay.