How to Manage and Reduce Your Debt Effectively in 9 Steps

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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 worsens things. But the first step to getting out of debt is learning your type of debt.

However, “What are the types of debt?” is a pretty broad question—there are many 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 action, whether 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 can take the collateral if you fail to repay 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 credit not secured by an asset. Examples include credit cards and medical bills not paid off by health insurance (or “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: generally set at a fixed rate over 30 years or more, requiring 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 Manage and Reduce Your Debt Effectively

Here are a few strategies you can use and a couple of debt relief options.

1. Know How Much You Owe

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

If you’re unsure about your debts and how much they cost, 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 costs in interest and fees.

2. Take a Hard Look at Your Budget

If you’re over your head financially, it’s easy to tell yourself 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 determine 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. Focusing on one kind of debt at a time is tempting because it’s easy to see how much progress you’re making.

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

To prioritize your debts effectively, start with any debt with 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 higher credit card balances 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.

However, 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 your monthly payments will rise even further.

Suppose you consolidate with a loan with a lower rate and high monthly payments. In that case, 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 eliminating or significantly reducing the debt.

9. Credit Counseling

Credit counseling is an alternative form of debt management that allows individuals and families with high debt levels 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 monthly payment.

Final Thoughts

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

Additional reading: What To Do 6 Months Before Retirement

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