Your ultimate guide to understanding and eliminating debt

How to consolidate debt

If you have excessive debt that is difficult to manage and make monthly payments, you may consider debt consolidation. Debt consolidation helps you lower your interest rates by putting all your debts into one monthly bill. Credit cards can have excessively high APRs ranging from 18-24 percent. Debt consolidation can help cut this in half. Although it doesn’t include student loans, mortgage refinancing, auto loans, or other secured debts, it can help alleviate other forms of debt. Different methods of debt consolidation include:

• A debt consolidation loan with a fixed rate: You can consolidate your debts into a single, fixed-rate loan that is dependent on your credit score.
• Transfer balances to a 0% interest credit card: A credit card with an introductory 0% APR for six to 24 months can help you eliminate debt. It does typically require a high credit score.
• A debt management plan: Negotiate with creditors to lower your interest rates, extend payment periods, and reduce fees. Debtors use a credit counseling agency to help you eliminate debt.

Gain financial freedom by paying off credit cards

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn More

Many Americans carry a credit card balance every month, which can impede their progress to becoming debt-free and reaching their financial goals. Improperly managing credit card debt—missing payments, carrying high balances, and maintaining high debt utilization rates—can negatively impact your credit score. To get rid of this debt, consider these two methods:

Debt snowball method

The debt snowball method is a technique that helps you build momentum by eliminating your debt. You pay your bills from smallest to largest; when you make headway through your smaller payments, it gives you momentum to pay off your big bills. As you start paying off your smallest bill, make sure you’re still making the minimum monthly payments on your other bills. Pay as much as you can until you pay off your smallest bill. Once you’ve finished paying it off, keep rolling through your lowest debt payments until you’re debt-free.

The only downside to the snowball method is it doesn’t account for interest rates. By waiting to pay off the highest bill, you can accrue interest and it may take you longer to become debt-free.

Debt avalanche method

In contrast, the debt avalanche method focuses on paying the highest interest rate first, instead of the smallest balance. Although this method may not be as approachable as the snowball method, this is helpful if you suffer from high interest rates, and it can help you get out of debt quickly.

Save or pay off debt

If you’re in a difficult financial situation, it can be hard to gauge whether to save money or pay off your debt. If you don’t have an emergency savings fund, it’s best to start there. Ideally, you should save for three to six months’ worth of expenses. Once you have a healthy emergency fund, tackle the unhealthiest debt in your life such as high interest rate credit cards, title loans, rent-to-own programs, and payday loans.

While you’re paying off your debt, explore other methods to increase your savings like loan refinancing, employer health saving options, and 401(k) matching.

Chapter 7 vs. Chapter 13 bankruptcy

When other methods of debt elimination fail, you may consider filing for bankruptcy. Filing for bankruptcy should be a last resort as it can stay on your credit report for up to 10 years. Creditors also deem people who have filed for bankruptcy to be high risk. If you do decide this is the right option for you, there are two forms of bankruptcy to choose from:

Chapter 7 bankruptcy

Chapter 7 bankruptcy eliminates all unsecured debts, which are debts not backed by collateral. When you file for Chapter 7 bankruptcy, the court grants you a temporary stay, which prevents creditors from collecting payments or taking significant action. If your filling is approved, it eliminates most debts, except for:

• Back taxes
• Court judgements
• Alimony
• Child support
• Student loans

Chapter 7 bankruptcy may require you to sell off certain assets like your house, car, or expensive jewelry.

Chapter 13 bankruptcy

Chapter 13 bankruptcy helps you reorganize your debts by implementing a repayment plan that takes three to five years to pay off. Similar to Chapter 7 bankruptcy, foreclosures, evictions, and debt payments are suspended during the filing process. To file for Chapter 13, you must meet certain qualifications such as having a regular income and not exceeding secured and unsecured debt thresholds. Secured debt is also excluded from this form of bankruptcy.

Utilizing these methods and tips can help you reach you financial dreams and eliminate your debt. If you need to reduce expenses to meet your debt payments, learn more budgeting tips.