9 Steps to More Effectively Manage and Reduce Your Debt

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When you’re in debt, it can feel like you’re drowning. You don’t know how to proceed, and every decision seems to make things worse. But the first step to getting out of debt is knowing what type of debt you have.

However, “what are the types of debt?” is a pretty broad question—there are lots of different types! And not all debts are created equal. Some are good debts, and some are easier to deal with than others, but all of them require some sort of action: whether that’s paying more than the minimum payment each month or deciding which debts to pay off first.

So let’s break down some of the most common types of debt.

The Four Main Types of Debt:

1. Secured Debt

Secured debt is when you borrow money using collateral. This means the lender has the right to take the collateral if you fail to pay back the loan. Examples of secured debt include loans on cars, boats, or houses; a car deposit; and some student loans.

2. Unsecured Debt

Unsecured debt is any type of credit that isn’t secured by an asset. Examples include credit cards and medical bills that aren’t paid off by health insurance (and so are called “medical debts”).

3. Revolving Credit

Revolving credit includes credit cards that allow you to pay off your balance in full each month and then use them again immediately afterward (although this can lead to more debt if you don’t watch out).

4. Installment Debt

Installment debt refers to debts with fixed payments over time—you agree to pay back a certain amount every month until it’s paid off in full. Mortgage payments are an example of installment debt: they’re generally set at a fixed rate over 30 years or more and require monthly payments until all principal and interest have been paid off completely.

If you’re struggling with debt, there are steps you can take to dig yourself out of the hole.

9 Steps to Effectively Manage and Reduce Your Debt

Here are a few strategies you can use, as well as a couple of debt relief options.

1. Know How Much You Owe

This might seem obvious, but many people don’t know exactly how much they owe. This makes it difficult to come up with an effective plan for paying off the debt — or even determine whether they’re actually in debt at all.

If you’re unsure about what debts you have and how much they’re costing you, try using a free online tool like Credit Karma or Credit Sesame. These sites will let you see what accounts are reported on your credit reports and how much each one is costing in interest and fees.

2. Take a Hard Look at Your Budget

If you’re in over your head financially, it’s easy to tell yourself that it won’t be a problem until next month. Maybe you’ll use the money you get back from the tax refund to pay off those cards — or maybe not.

But if you don’t know where all the money goes each month, it’s impossible to know how much you have left over after paying bills and buying groceries. It’s also hard to tell if there are any places where you could cut expenses or make more money by working more hours or taking on a side gig.

The best way to figure out where your money goes is by creating a household budget and tracking your spending for a few months (or years). It may seem like an overwhelming task at first, but once you’ve done it once, it becomes easier each time because you’ll already have some numbers in mind when looking at additional expenses that come up.

3. Decide Which Debts to Pay Off First

If you have a lot of different types of debt — student loans, credit cards, and car payments, for example — it can be overwhelming. It’s tempting to focus on one type of debt at a time because it’s easy to see how much progress you’re making.

(And if it takes you a while to pay off one loan, at least you know what that means.) But paying off one type of debt doesn’t mean that everything else will magically disappear.

To prioritize your debts effectively, start with any debt that has an annual percentage rate (APR) over 25%. These high-interest loans cost more than they should and should be paid off as soon as possible. If they aren’t, they’ll quickly become unmanageable even if they’re small amounts compared with other debts you may have.

If your credit card debt includes multiple accounts with different APRs but no rewards programs or other perks, consider consolidating them into one low-rate card first and then focus on the rest as they’re paid off.

4. Pay Off High-Interest Debts First

Once you’ve assessed what debt needs paying off first, it’s time to start making payments on those accounts. You can use the money saved from closing unnecessary accounts toward paying down high-interest debt first — like credit cards — while keeping other student loans or mortgages in place until they’re paid off completely.

5. Buy Only What You Can Afford

Buying things you can’t afford is a sure way to end up in debt, and that kind of financial stress will make life feel miserable.

To help you get out of debt quicker, you’ll need to stop spending money on anything that isn’t essential, such as going out to eat or shopping until you get your finances under control. That means not buying something – even if it’s on sale!

6. Balance Transfers

If you have credit card balances that are higher than what you can pay off in full each month, consider transferring your balance to a card with a lower interest rate. This may be the fastest way to pay off debt because you can make larger payments while saving money on interest.

7. Debt Consolidation

Debt consolidation can help you pay off your debts. You may be able to combine all of your debts into one loan, which will result in a single monthly payment rather than multiple ones.

But there are some drawbacks to debt consolidation. For example, the interest rate on these loans is usually higher than what you’re paying now on your credit cards or student loans because they’re riskier for lenders to give out, so this means that your monthly payments will rise even further.

If you consolidate with a loan with a lower rate and high monthly payments, then it might not be worth it in the long run—but if you do decide to go this route anyway (and have good credit), then try not to take out more money than needed from your savings account or retirement fund before starting the process; otherwise, any money saved up could get sucked up by debt very quickly!

8. Debt Settlement

Debt settlement is a process that allows you to negotiate with your creditors to pay back less than what you owe. The creditor will often accept a lump sum payment or monthly payments. Debt settlement can help you avoid bankruptcy and save money in interest and fees by getting rid of the debt entirely, or at least significantly reduce it.

9. Credit Counseling

Credit counseling is an alternative form of debt management that allows individuals and families with high levels of debt to work out repayment plans with lenders or creditors without filing bankruptcy.

A counselor will meet with the person seeking help and create a budget based on income and expenses. Then, the counselor negotiates with creditors on behalf of their client to lower interest rates or consolidate debts into one manageable payment per month.

Learning about your debt and how to get out of it is a process, but you can do it. Start by understanding the different types of debts you have and deciding on the best way to deal with each one. Then seek help from a professional that can help you accomplish your goals!

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