Managing Your Debt

MANY of us make one of the most consequential financial decisions of our lives before we even hit the legal drinking age: borrowing money for college.

The college acceptance letter is followed by the financial aid package, which is really just a nicer way of stating how much debt you will need to amass to pay for your degree.

It is at that moment that Americans – teenagers! – have their first encounter with the debt culture that is ingrained in how we pay for just about everything. It is always there, for the taking, to buy cars, homes and more. US households carry more than US$17 trillion, for all of it, including credit cards.

So while we have normalised indebtedness in this country, we have also moralised it: If you have debt that you cannot afford to pay back, you must have done something very wrong.

Yet we know that is often the furthest thing from the truth. Many people accumulate debt, not because of lattes and exotic vacations, but because of circumstances beyond their control, from health issues to job loss.

Then there are the structural reasons that most people borrow, such as wages not keeping pace with education costs and a societal decision to push more of the burden onto individuals.

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For now, we are going to focus on the microeconomy that is you: How to improve your credit, avoid debt where you can and manage the debt you have.

Spending awareness

The first part of debt management is simply becoming more aware of where your money goes and spending with intention.

In an increasingly cashless society, it is easier to lose track of our spending because there is little friction – you don’t even need to pull out a wallet, you can just tap your phone, and some money is charged to your credit card or siphoned from your bank account.

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Understanding your credit profile

Look at debt as a tool that you have to use carefully. It can also help improve your credit profile – and may have already.

In fact, people with debt who make timely payments may already have solid credit scores, the three-digit number that lenders use to judge you when deciding whether to make you a loan (and how much interest to charge for it). Landlords often use them when considering rental applications.

But having too much debt can drag down your score, which generally ranges from 300 to 850 – the higher, the better.

The bottom line: Paying down debt regularly will help strengthen solid scores and improve less-than-perfect scores, which can lead to better interest rates.

Got debt? Make a plan

There are several different approaches to tackling credit card debt:

Don’t forget one of the oldest tricks: ye olde balance transfer offer, where you transfer your debt to a credit card with an introductory rate of 0 per cent. With interest rates on the rise, these deals are harder to find, but it is worth a shot. Be sure to evaluate the transfer fees (which have risen) and how much you would need to pay each month to be debt-free once the introductory rate expires.

Consolidating your debts into a personal loan is another option. The interest rates are nearly as high as those for credit cards, but there is some variability across lenders, so it pays to shop around.

For people with debt on multiple credit cards, the so-called avalanche method is the most practical – you focus on paying down your highest-cost debt first. Pay the monthly minimums on all of your card debts (to avoid any late fees). Then, throw the money you have left over towards your credit-card balance with the highest interest rate. Once that is zapped, put the extra money towards the next highest-cost debt.

The second strategy, known as the snowball method, may be more psychologically rewarding for people who want a quicker win. Here too, you pay the monthly minimums on all of your debts, but put the extra money towards your smallest-balance debt first. The logic here? You knock out debts more quickly, which can be highly motivating and spur you to keep going.

Medical debt

Medical debt is different from other consumer debts. After you have made sure the bill is accurate and your insurance (if you have it) paid every cent it should, ask your provider to reduce the bill to a more manageable amount, then work out a payment plan. Even if collectors are hounding you, do not put the debt on your credit card: Once you do, it will look just like any other consumer debt.

Managing your student loans

If you have already amassed some credit card debt but also have student loans, you are probably wondering how to balance the two. Even though federal student loan rates have risen, they are still far less than most credit cards, which now carry insanely high rates of 22 per cent, on average. The same rules apply here: You want to stay current on your student loans while also attacking your highest-rate debt first.

If you are overwhelmed with other consumer debts, there may be a way to safely reduce your student loan payment while you focus on the former. Run your numbers on Studentaid.gov’s loan simulator, which will calculate your monthly payments under different repayment plans, along with how much you will pay in interest over the life of the loan.

But that is a step that all student borrowers should take to ensure you are in the best repayment plan, given your circumstances.

For people struggling to make ends meet, income-driven repayment, or IDR, plans may be the most affordable option: They base your monthly payment on your discretionary income and household size. After you make payments for a set period, somewhere between 10 and 20 years, the remaining debt is cancelled. NYTIMES