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Writer's pictureMichael Belfor

5 Ways to Manage Debt Effectively


Getting into debt can be fun for a moment (hello, last-minute trip to Cabo!), but that debt hangover will last long after those margaritas have made their way out of your system. Once your splurge is over, you’re left with a long-term debt obligation that may grow ever larger, thanks to compounding interest.


Let’s face it, debt is the pied piper that demands you sacrifice current and future wants and needs for past spending. It can also prevent you from achieving your goals if this debt hurts your credit score or results in a high debt-to-income ratio, making it harder to borrow more money.


So, nip that obligation in the bud and get that piper off your back by managing debt effectively.


Prioritize Debt

You can’t manage debt without taking inventory of all your debts first. Make a list of all your outstanding debts, including mortgages, credit card payments, student loans, car loans, and any other obligations you may have.


This list should include:

Name of the creditor (i.e. Visa, Navient)

Amount owed

Due date

Minimum monthly payment

Interest rate/annual percentage rate (APR)


You may be tempted to look at the total sum, throw your hands up, and begin plotting your new identity in Mexico. Don’t freak out just yet! This number does not define you. We’re working through these figures to manage debt, so do yourself a favor and stay focused on the task at hand, which is reducing this number.


Start by addressing the debts with the highest interest rates. Paying these down will save you the most money in the long run, since these rates are nabbing a good chunk of your monthly spending. It also makes sense to put any extra money you can toward paying off these debts sooner.


If all your debts are similar in size, start with the one that’s approaching your maximum credit limit. For example, if you owe $13,500 on a Visa that has a credit limit of $15,000, that may be the one to tackle first. Using all, or most, of your available credit can hurt your credit score and your potential to borrow more in the future.


Consolidate Debt

Another way to manage debt is to consolidate your obligations. This is especially helpful with high-interest credit card debt. Consolidating debt is helpful and convenient for a few reasons. The first is that you can anticipate a single, predictable interest rate each month. The second is that you have only one payment.


Keeping track of due dates, balances, and interest rates can be a pain. This might have even gotten you into trouble in the first place! Consolidating debt eliminates this problem and packages your debt in a manageable way. From there, you can begin chipping away at the principal each month.


If you want to manage debt through consolidation, the best way to do that is through either a:


Debt consolidation loan that carries a fixed interest rate


Balance-transfer credit card that offers a 0% promotional rate for a fixed period


Refinancing your mortgage may be an option to consider, too


Be sure you understand all the terms of your consolidation program, including interest rate (especially if the offer comes with a temporary promotional rate), minimum monthly payment, and due date, before signing up. A financial or loan advisor can assist you with this process.


Curb Spending

The easiest way to manage debt is to not accumulate it in the first place. Some debt, such as a mortgage, student loans, and medical bills, are not what we are referencing. However, a quick look at your credit cards and bank statements is likely to tell you there are plenty of charges that were entirely avoidable. That Groupon flash sale? Three separate online streaming services? Black Friday? Any of that ring a bell?


We don’t want to be buzzkills here. There are absolutely some expenses that bring us so much joy for a reasonable amount of money. Unless we’re in dire financial straits, we’re not cutting those. But we can reduce them. One streaming service will likely suffice. Food and drinks are cheaper during happy hour. Concerts are, well, kind of non-existent right now, but when we’re back in the swing of things, tickets are typically cheaper if you buy them pre-sale.


The point is there are many, many places where you can trim the fat. The funny thing about that is when you manage debt in addition to your spending, that fat ends up right in your wallet. What you do with a big wad of cash is up to you, though we’d suggest paying off your debts or saving for a rainy day. We know, adulting isn’t as fun as the grown-ups made it out to be.


Create a Budget

How do you really know how much money is going in or out each month if you don’t have a budget? The answer is that you don’t.


Manage debt and your income by making a list of all your monthly expenses. That includes every charge on your credit and debit cards and every receipt from a cash purchase. It also includes monthly bills, such as the mortgage or rent, insurance payments, gas, and other expenses.


Log each expense into a category, such as housing, transportation, at-home food, restaurants/takeout, in-home entertainment, entertainment out, shopping (i.e. clothes, home goods, presents, etc.), travel, and so on. Take a good, hard look at what you’re spending on each, how much money you have left at the end of the month, and how much you’d like to have left at the end of the month. Come up with a reasonable budget for each category…and then start trimming.


Don’t stop there, though. Now you have to determine what you’ll do with all that extra cash. If getting out of debt is your primary goal, then dedicate a good chunk of this wad to either paying down your high-interest debt or your consolidated debt.


Save for a Splurge

Now you know how to manage debt. What’s next? Anything you want (get Cabo on the phone, stat!). The beauty of having cash in the bank is that the sky’s the limit in terms of what you do with it! Buy a home, car, or boat. Take a grand vacation, visit family, or reinvest in yourself by discovering a new hobby.


This is one of the few situations where the destination is irrelevant. When it comes to managing debt effectively, it really is all about the journey. And once you’re moving forward on that journey, you’ll find that so many doors are open to you.


Individuals and families with a low amount of debt compared to their income—known as a debt-to-income ratio, or DTI—have more spending power because they have more borrowing power. Paying off your debts and keeping your debt levels low shows lenders you’re responsible when it comes to your finances and that you take your debt obligations seriously.


Those who regularly pay down their debts every month—without accruing tons more over time—also typically have a higher credit score. This is another essential component to securing a loan and favorable borrowing terms, such as a low interest rate.


When you manage debt, you also manage your credit, so be sure to obtain your credit score if you haven’t done so in the past few months. You can pull free credit reports from the three main credit agencies, including Experian, Equifax, and TransUnion.

From there, you want to make sure you:


Pay (at least!) your minimum credit card balance on time each month


Never use more than 30% of your available credit at a given time


Refrain from closing out old credit accounts, which lowers the amount of credit available to you (and your credit score)


Apply for new credit sparingly, since too many applications in a short period of time also lowers your credit score


If you can manage debt, you can get out of debt—and we know you can do this! It may take a little math, time, and sacrifice, but it’s so worth it once you see the bigger picture and all you can do with a healthy balance sheet and credit score. After that, it’s up to you how you’d like to reap the rewards. Personally, we prefer our rewards with a little salt on the rim.


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