Even if you're financially responsible, life's unpredictable nature can catch you off guard, making it dangerously easy to fall into debt. If that happens, these tools and tips can help you manage that debt.
Need assistance getting out of debt? Access our coach to help you along the way by clicking here!
Debt Strategies
The strategies below are a few tried and true methods to help you get back in control if you find yourself overwhelmed with debt payments (and even if you’re not overwhelmed, per se, these will still help you pay off your debt faster).
- Debt Snowball Method: With this method, you start small and work your way up. Begin by focusing on paying off your smallest debt first. Then, take the amount you were paying for that debt and pay it toward the next smallest debt, and so on until everything is paid off.
- Debt Avalanche Method: Just like an avalanche, you knock out the big things first and then work your way down. Focus on paying off your highest interest rate first, then roll those funds into the next highest, and then the next.
- Debt Management Plan: This is a plan set up by a non-profit or credit counseling agency to help you pay off your debts. Your counselor negotiates and handles everything with your lenders, often helping you get a lower interest rate or waiving fees. Once it’s set up, you only need to make a single payment to the agency, they handle the rest.
- Debt Consolidation: Debt consolidation allows you to combine all of your debts into one payment by taking out a new loan, ideally with a lower interest rate, and using it to pay off your debts. Be careful though, sometimes you could end up being in debt longer because of the new loan and thus paying more interest overall.
Tips to Get Out of Debt
Beyond the major strategies, there are other adjustments that you can make to your approach to debt and daily spending habits that make a large impact when it comes to paying down debt.
- Pay More Than Your Minimum Balance: Adding even just a little bit of extra money to your monthly payment helps you pay off your debt sooner and pay less overall.
- Reduce Expenses: The simplest thing you can do is stop spending on anything that is non-essential. Since debt doesn't go away by itself, the money you save by cutting out non-essential expenses can go toward eliminating your debt.
View our "Debt Payoff Calculator" here to explore how long it will take to pay off your own debt.
- Negotiate With Your Creditors: If you can’t afford your minimum payment, you can ask your creditors to rewrite the terms of your credit agreements so that your bills are easier to pay. This often means making smaller payments over a longer period of time, which does mean that you'll end up paying more interest and therefore increasing the overall cost of resolving debt. But that's usually a better solution in the long run than having to default or declare bankruptcy.
- Use Debt Counseling Services: If you need help dealing with your creditors or figuring out the best way to handle your debts, a non-profit credit counseling service may help. For a relatively modest charge, they'll work with you to come up with a feasible repayment plan. You can also use the Banzai Debt Coach to make a plan.
Why are late and missed payments bad?
Late and Missed debt payments are bad for your credit score. Your credit score determines how much you can be trusted to borrow, and what your interest rate would be if approved. Forgetting to pay your credit card on time might eventually prevent you from getting a home or car loan. Late payments can drop your score 30-90 points depending on the type of debt, take up to 1 year to recoup your original score, and stay on your report for up to 7 years. Payment history makes up the largest piece of the pie when calculating your score, contributing to 35% of your score.