Not all debts are equal, some can be beneficial, while others, the “bad debts,” carry long-term financial weight. However, the upside? Reducing or even eliminating bad debt is very achievable. With a clear understanding of your debts and amounts owed, here’s a guide to help you get on top of things.
Consider dividing your expenses into “essential” and “extra” to manage debt effectively. Essentials cover the necessary costs that keep your life and finances steady, like housing, utilities, food, transportation, and basic clothing. Extras include optional expenses, like entertainment subscriptions, eating out, luxury purchases, and other non-essential shopping.
Trimming down on these extras can free up cash for your debt repayment. For instance, canceling a $15-per-month streaming service might not seem like much, but it adds up to $180 a year—extra funds that can go directly toward your debt and start making a real difference.
Selecting a debt payoff method that aligns with your financial goals and personal motivation. Two effective strategies are the snowball and avalanche methods:
Only paying the minimum on your debt each month can trap you in a cycle of interest charges and slow down your progress significantly. Increasing your monthly payment—even by a small amount—reduces the payoff timeline and cuts down on the total interest paid. For example, consider a $5,000 debt at a 20% interest rate: paying just $100 monthly would take roughly nine years to eliminate the debt.
But by increasing that payment to $200, you could pay it off in under three years and save a substantial amount in interest. Regularly paying more than the minimum helps you make faster progress and can improve your credit score by lowering your credit utilization ratio.
Aside from cutting costs, putting unexpected income directly toward debt can make a noticeable impact. Windfalls like bonuses, tax refunds, or even small gifts can go a long way if applied to debt balances.
You might also try the “debt snowflake” strategy, where you save small amounts from everyday expenses, like using coupons, buying generic brands, or reducing electricity and water usage, and put those small, daily savings toward your debt. Although each contribution may seem small, they can create significant progress over time, similar to how individual snowflakes can create a snowdrift.
If you’re juggling multiple debts, debt consolidation may be worth exploring. This strategy combines your outstanding debts into a single loan or moves balances to a zero-interest credit card, making your payments more manageable.
Consolidation often reduces interest expenses and simplifies budgeting, as you deal with one payment instead of several. However, before deciding, be mindful of any fees, changing interest rates, or loan terms to ensure they fit your financial plan. Debt consolidation can be an effective tool, but it’s essential to understand the costs and commitments involved.
A Debt Management Plan (DMP) can offer a structured path toward financial stability for those feeling overwhelmed by debt. With a DMP, a nonprofit credit counseling agency works with you to assess your budget and negotiate with creditors to potentially lower interest rates or waive fees.
Under a DMP, you’ll make a single monthly payment to the agency, which distributes funds to your creditors. While this option can bring relief, it’s advisable to avoid new lines of credit during the plan, as DMPs reduce existing debt, not increase it. Some creditors might note your DMP on your credit report, temporarily affecting your credit profile.
When debt becomes unmanageable, debt settlement may provide a final option for relief. Debt settlement involves negotiating with creditors to reduce the total amount owed through a lump-sum payment or modified terms, such as waived interest and fees. This approach can be attempted independently or with the assistance of a debt settlement company.
While debt settlement can provide immediate relief, it often impacts credit scores and may have tax implications for any forgiven debt. It’s usually best considered when other options have been exhausted and if you’re unable to meet regular payment obligations.
Excessive debt can be a red flag, mainly if you rely on credit cards for routine expenses or use new debt to cover older balances. It’s also a concern if you can only make minimum payments, which means debt could linger longer and accrue more interest.
Ian Jennings, a Qualified Financial Advisor (QFA) and CFA Charterholder, points out the emotional toll of debt. “Financial strain can affect relationships, quality of life, and personal freedom,” he says. “Reducing debt is essential for financial security and overall well-being.”
Not automatically, but that doesn’t mean you shouldn’t aim to lower it. Credit scores hinge on factors like payment history and credit utilization. According to FICO, 35% of your credit score is based on payment history and 30% on credit utilization—how much debt you carry versus your credit limit.
Even if you’re always on time with payments, a high credit utilization ratio (maxed-out credit cards) can reduce your score. Ideally, you want to use 30% or less of your available credit. For example, with a $5,000 limit, keep balances below $1,500 to improve your score.
A popular budget for paying off debt is the 50/30/20 method. With this approach, 50% of your income covers essentials, 30% goes toward non-essentials, and 20% is allocated to savings and debt repayment.
Try directing part of that 30% discretionary portion toward outstanding balances to accelerate your debt payoff.
While bad debt can be overwhelming, taking control is entirely within reach. Sticking to these strategies can steadily reduce debt and strengthen your financial footing. Along the way, reevaluate spending habits to avoid falling back into debt so that once you’re debt-free, you can stay that way.
Judith Harvey is a seasoned finance editor with over two decades of experience in the financial journalism industry. Her analytical skills and keen insight into market trends quickly made her a sought-after expert in financial reporting.
