How to manage debt effectively and what to do when it’s more than you can handle on your own.
Managing debt is an essential skill in today’s financial world. Let’s face it – most of us are going to have some sort of debt throughout most of our adult lives. Debt isn’t always bad. It allows you to do things like buy a home and a car, and send your kids to college.
If debt is going to be part of your financial outlook, you need to know how to manage it effectively to avoid problems. You also need to know what to do if your debt payments ever get out of control and become more than you can afford.
The information below is designed to help you manage debt. If you have questions or need help making a plan to make out-of-control debt payments more manageable, we can help. Call us at to chat with a certified credit counselor or ask for help with a free Debt & Budget Analysis.
The key to managing debt
Effective debt management is all about one thing: balance. If your debts are balanced against the rest of your budget – especially your income – then you can afford to make your payments while paying for other expenses (and even setting something aside for saving).
This makes your debt-to-income ratio a key factor in assessing your financial stability. If you check your debt-to-income ratio regularly and always make sure to keep it below 36 percent, then you are less likely to face serious problems with debt.
Managing certain types of debt:
In addition, you want to make sure that your credit card debt payments never take up more than 10 percent of your monthly income. If you spend more than?10 percent on your credit cards every month, you have less money available for spending and saving. This is where financial distress can become an issue.
Why is credit card debt so problematic?
Credit card debt tends to cause problems because there is no fixed payment. Loans like the ones for your house and car are fixed. You pay the same amount every month so they’re easy to plan for and most of us don’t buy more home or car than we can afford.
By contrast, it’s easy to overspend on credit and get into trouble. Since it’s a unique type of debt the more you charge, the more you owe each month. When you rely too much on credit or make too many big purchases, your payments become more than you can handle comfortably.
When it’s time to look into debt relief
At the very first sign of trouble, you should take steps to reduce your debt. You can use a credit card debt calculator to make a plan that pays off your debt in the quickest way possible.
If you can’t make a plan that works for your budget?and allows you to pay off everything you owe within the next five years, then you need to find a debt relief option that will help you.
If it takes longer than five years to eliminate, then you’re basically only paying off interest charges and barely making a dent in the actual debt. You’re essentially wasting money and you need an alternative.
Finding the right solution for out-of-control credit card debt
Your first stop in finding a debt solution should be debt consolidation. If your credit scores are high and you catch a debt problem early, then you should be able to use do-it-yourself debt consolidation options, such as a credit card balance transfer or a personal debt consolidation loan.
If your credit scores are low, then these options may not work for you, because you won’t qualify for interest low enough to provide the benefits you need – namely, lower monthly payments and interest. In this case, you’ll need help if you want to consolidate the debt effectively.
This is where a debt management program is useful, because it’s like an assisted form of debt consolidation. You’ll need to go through credit counseling to verify this is the right option for you before you enroll.
If a debt management program won’t work, then you can explore options for debt settlement, where you take a bigger hit to your credit but settle your debts for less than you owe. If you can’t use debt settlement, then your last option on the table is bankruptcy.
What about other debts?
Credit card debt tends to cause the most problems, but that doesn’t mean people don’t struggle with other debts, too. Changes in your financial situation can lead to problems with your mortgage, in which case you should turn to HUD-approved housing counseling to explore options that help you avoid foreclosure. Student debt can also be problematic. You can consolidate federal student loan debt, but only with other student loans – i.e. it’s a separate program from the solution you use to consolidate credit card debt.