Debt Management

The first step to getting out of debt is making a budget. Once you know where your money is going each month, you’re able to identify ways to save. Next, utilize a debt avalanche or debt snowball method, which targets debts with the highest interest rates first. Look for ways to increase your income, consider using a debt consolidation loan, and keep track of your progress. Paying off debt can be overwhelming, but breaking it down into these steps can help you become debt-free more quickly and effectively.

Though it may seem counterintuitive, settling debt often has a negative impact on credit scores. Credit scores are designed to reward accounts that have been paid on time and according to the original credit agreement. A debt settlement plan—in which the borrower agrees to pay a portion of the outstanding debt—modifies or negates the original agreement, which causes credit scores to drop.

Debt consolidation is a process in which you combine multiple debts into a consolidation loan. This is a single loan that rolls all of your prior debts into one monthly payment at one interest rate.

A debt avalanche is a debt repayment strategy that targets debt with the highest interest rates first. Make the minimum payment on each source of debt, then devotes any remaining repayment funds to the debt with the highest interest rate. Once the debt with the highest interest rate is entirely paid off, then the extra repayment funds go toward the next-highest interest-bearing loan. This continues until all the debts are paid off.

Debts with high interest rates as well as though that will affect your credit score most if you fall behind should be paid off first if possible. Other types of credit, like student loans, can be more benign. In many cases, debtors should pay off credit card debt first. Not only will you be saving yourself from a double-digit interest rate, revolving credit card balances are weighted against you even more than other types of debt, meaning your credit score will likely go up.