Not all debt is the same. In fact, many experts break debt into two categories: good and bad.
Something like a fixed-rate mortgage generally counts as “good” debt. That’s because it usually comes with a (relatively) low interest rate, and it pays for something that may grow your wealth over time.
Bad debt, however, usually has high or variable interest rates, and is generally not structured to grow your wealth. Think of something like credit card debt, which can have interest rates north of 20%.
It’s important to get rid of bad debt quickly; if you don’t, high interest rates could leave you paying significantly more than you borrowed in the first place. Those same high interest rates can make paying off your debts feel unmanageable.
If you feel like your debts are out of control, you’re not alone. A May report from personal finance company Achieve and Money.com found that around 44% of 2,000 Americans surveyed feel overwhelmed by their debt.
But there are still ways to pay your debt down even when it feels like it’s too much. Here are six tips from financial professionals on how to get rid of bad debt before it becomes a bigger problem.
1. Don’t ignore or avoid your debt
It can be very easy to “forget” about your debt because it’s too stressful to think about.
“Don’t just ignore the debt, which many people do. They just ignore it, like it’s going to go away. Like it’s a ghost,” says Christopher L. Gandy, president of the National Association of Insurance and Financial Advisors. “‘If I close my eyes, eventually I’ll wake up, the nightmare will go away.’ It doesn’t. It just gets bigger in the corner of the room and eventually it will come out and eat you.”
The earlier you face your debt, the more options you may have to handle it.
2. Get organized: Log your current finances
You can’t know how much you can afford to put toward your debt until you know how much you’re saving and spending each month.
Mary Sasmaz, a CFP and assistant professor at Case Western Reserve University, teaches a personal finance class in which she asks students to look back at their money and log their spending, then sort each purchase into “needs” and “wants.”
She says that this exercise helps them not only understand where their money is going, but also become aware of their spending patterns. This means they can spot where they’re regularly making spending decisions they probably shouldn’t, something that can lead to bad debt if you do it often enough.
3. Make a budget — but keep it sustainable
Once you’ve logged your finances — both what comes into your accounts each month and what comes out — you can create a budget. You’ll probably need to make some cuts when you do.
“In America, we overspend. People that make $100,000 live like they make $200,000,” says Gandy. “Develop a budget, create a plan, and stick to it.”
Gandy says that actually carrying out the plan is where most people fail.
To help prevent this, make sure your plan is sustainable. That means you shouldn’t cut every single “want” out of your budget entirely. That’s not going to be something you can stick to long-term.
Instead, plan to put a specific amount of money toward non-necessities each month. That way, your discretionary spending can be more effectively managed instead of something you do at the spur of the moment and feel guilty about later.
You should also make some room for savings, even while paying off debt. Saving a little each month can help protect you from having to go more into debt if there’s an emergency.
4. Pay down the highest interest rate debt first
If you’re dealing with high-interest debt, you’ll generally want to pay off the debt with the highest interest rates first. This is called the avalanche method, and it will help you pay the least amount of interest possible on your debts.
Gandy explains that the method works by ranking your debts in order of interest rate, from highest to lowest. While paying the minimum on all of your debts, you allocate any more money you can to the highest-interest debt first. Once that debt is paid off, you add that money to payments on your next-highest debt, and so on.
You’ll still pay a lot of interest over the life of your debt (this is why high interest rates are so painful), but tackling the highest-interest debts first will minimize the damage.
5. Automate your savings and debt payments
Once you know how much you plan to spend, save, and put toward debt, it’s time to carry out your plan. Automating your savings and debt payments is an effective strategy to help reduce spending money you meant to use elsewhere.
As Sasmaz puts it, even the most disciplined savers will still spend what’s there.
She says using the “pay yourself first” method, where you immediately put some of the money from each paycheck to a separate savings account or toward your debt, will help keep you on track. This isn’t as complicated as it sounds; most banking apps will let you set up a recurring transfer in minutes.
6. Consider getting professional help
If you’re too overwhelmed to get out of your debt on your own, using a credit counselor or a debt relief company can help. These are two separate services with different price points, but either can help you out of a tricky situation.
Credit counselors will help you figure out a plan to deal with your debt. There are many nonprofit credit counselors who will help you with your debt for free, although not every credit counselor works for a nonprofit institution. Your amount of debt doesn’t change when you go to a credit counselor; they just help you make a plan.
Debt relief programs offer a more hands-on approach for consumers struggling with unsecured debt, with professionals working on their behalf to negotiate with creditors and help them resolve debt for less than the full amount owed. Like most professional financial services, debt relief programs charge fees for successful settlements.
“In debt relief programs, someone actually negotiates your debt terms with the lender,” Sasmaz says. “They can negotiate the amount. Maybe they can negotiate the terms, which might be the amount of time you have to pay it, and the amount of monthly payment that you make.”
For these services, debt relief companies typically charge fees, but only after a settlement is reached and accepted by the consumer.
Debt settlement results vary and settlements are not guaranteed. However, for consumers facing significant financial hardship, debt relief can reduce the total amount of debt owed and provide a structured path toward becoming debt-free.
Following these steps won’t make your debt disappear overnight. But making a plan, and asking for help if you need it, will help make even bad debt more manageable going forward.
