If you’re dealing with some form of debt, take heart, you’re not alone. According to Debt.org, over 87% of American households are in debt.1
While no one likes thinking about their debt, it’s important to understand it. The truth is, not all debt is bad debt. Here are some basic steps you can take to make good debt work more positively and approach bad debt responsibly.
Good debt can help you increase your long-term income and raise your overall net worth but proceed with caution—if plans don’t work out as expected, good debt can become bad debt. One example of good debt is taking on a mortgage. This can help you purchase a home that could be sold for profit or a commercial property that could generate rental income. Additionally, a small business loan can help make your dreams a reality and turn your passion into profit—certainly a form of debt worth taking on.
This is the kind of debt to stay as far away from as possible. It can form if you borrow money or purchase items that don’t increase in value or generate income over time. If what you want to buy won’t do the latter of these things, it’s likely not a financially wise purchase to make.
While cars, clothing and consumables are all associated with negative debt, credit card debt is, by far, the most common form of bad debt. Credit cards make it easy to splurge and unchecked shopping can be a slippery slope. Thankfully, thoughtful management can avert this unsavory financial situation. When deciding which credit card is best for you, watch out for the expiration of 0% trial periods and minimum payments as those can quickly add up to penalties and interest.
What You Can Do
There are several ways to manage all types of debt:
A consolidation loan puts your high-interest debt into one loan at a lower rate of interest, while also offering an introductory 0% APR for the first year or more to ease the debt pile-up as you pay it down.
The Snowball Strategy is a popular method in which you pay off your debts from smallest to largest, building on your victories along the way. On the flip side, the Avalanche Method emphasizes paying off your highest-interest debts first, giving you the most bang for your buck. Choosing a payoff playbook actually depends on your particular situation, so learn more about the Snowball Strategy and the Avalanche Method.
If your car loan or mortgage payments are getting to be too much, consider refinancing.
In worst case scenarios, some efforts to gain relief include debt settlement, which is an agreed-upon lump-sum payment, and bankruptcy, when your assets are turned over to a trustee to liquidate in order to pay off the creditors.
However you choose to deal with debt, you’ll have to create a budget to save enough to pay it down—but you don’t have to go it alone. From developing savings tactics to building up an emergency fund, speak with a financial advisor to ensure a healthier financial future.