Debt Management: 4 Effective Strategies You Need to Know
Still reeling from the pandemic and subsequent inflation caused by supply chain issues and major global events, Americans are facing higher debt levels than ever. As of the third quarter of 2024, families in the United States had a combined $17.9 trillion in debt. Meanwhile, delinquency rates for credit cards and auto loans had reached levels not seen since 2008. The average household debt was more than $100,000.
High levels of debt restrict your ability to save for the future, potentially pushing back your retirement plans, and can be incredibly stressful to manage on a day-to-day basis. Regardless of how much you owe, it’s never too late to take action and start working on eliminating your debt.
Here’s a look at four effective debt repayment strategies.
Debt Consolidation
Many Americans have multiple types of debt, including credit card debts, student loans, and personal loans. These may all have varying interest rates and can be difficult to manage while still trying to make monthly bill payments. A debt consolidation loan can be a good option to combine those debts into a single loan, typically with better terms and a lower interest rate. This can reduce monthly payments and provide other benefits, like improved cash flow.
Lines of credit and home equity loans are two common types of debt consolidation loans. Taking out a loan against the equity in your home can be helpful for those in dire financial situations, but you should first speak with a qualified advisor. There are risks involved, including the possibility of losing your home if you don’t make regular payments.
Balance Transfer Offers
Similar to a loan consolidation, a balance transfer allows you to get a clearer picture of your debt and the time it will take to pay it off, although it is only for credit cards. Consumers can pay off their debt quicker and with less interest by transferring balances on high-interest cards to one with a lower interest rate. Some creditors offer balance transfer credit cards with introductory annual percentages rates (APR) as low as 0% and one-time transfer fees ranging from 3% to 5% of the transferred debt amount.
For example, let’s say you have $10,000 in credit card debt and a 20% APR. It might take you about 67 months to pay off the principal and more than $6,000 in interest with a $250/month payment. By transferring this debt to a 12-month balance transfer card with a 0% APR, you can work on paying off the debt interest-free within one year.
You should be serious about paying off debt within the no-interest timeline offered by the creditor. If you exceed the credit limit or make late payments, the creditor may choose to impose a penalty rate upward of 29.99%. Interest rates can also increase significantly at the end of the promotional period.
Hardship Programs
Some creditors offer hardship programs to help borrowers struggling to make monthly payments. Consumers can negotiate alternative payment terms on a temporary basis, usually between three and 12 months, with options to reduce monthly payments or lower or eliminate interest, depending on the creditor’s terms. Qualifying requirements vary by lender and can include a reduction in pay or loss of job, sudden medical conditions or disability, natural disasters, divorce, or a death in the family.
While these programs can reduce out-of-pocket expenses and help protect you from collection agencies, there are some disadvantages that come with entering into hardship agreements. These include lower credit limits and a frozen credit line. Hardship programs are primarily suited to people with relatively low debt from one creditor, rather than people with high debt from multiple lenders.
If you have several creditors and multiple types of debt and you owe large amounts, it may feel overwhelming to contact these creditors individually, ask for hardship agreements, and manage all the payments each month. If this sounds like you, it might be a good idea to see a credit counselor. These professionals can help you work with creditors to set up debt management plans. There are costs, of course, for using a credit counselor, or debt management plans, but they can relieve you of a lot of work and anxiety, as they handle the payments, and often negotiate lower payoff amounts with the various creditors.
Bankruptcy
Bankruptcy is a last resort option, but one that provides several layers of protection for people with excessive debt. If your debt continues to pile up and becomes unmanageable, filing for bankruptcy can keep debt collectors at bay and restrict them from seizing assets, initiating foreclosure proceedings against your home, or filing lawsuits. It also deters them from carrying out aggressive collection strategies as they are subject to court oversight.
However, there are huge downsides to declaring bankruptcy and it should be avoided if at all possible. Filing fees exceed $300 and attorney fees can be anywhere from $1,000 to $6,000. Your credit score will also take a major hit, making it harder to secure low-interest loans for the foreseeable future and to rent an apartment or home. Your insurance premiums may rise, too. If you declare Chapter 7 bankruptcy — the most common filing for individuals — it will stay on your credit card for a decade. In addition, you may have to wait four years after your bankruptcy case is closed to apply for a mortgage.
Create a Budget and Stick to It
Whichever of these option you choose to manage your debt, the most important thing to do is to make and maintain a strict budget, ensuring your monthly income exceeds your expenses. If you want to avoid any of the options above, make sure to create your own budget that factors in debt payments. Also, it goes without saying that increasing your income, through part time jobs, or “side hack” businesses or efforts, can accelerate your journey to being debt free.
