Managing your debt

It’s time to get your money in order.

Many of us make one of the most important financial decisions of our lives before we even reach legal drinking age: borrowing money for college.

The college acceptance letter is followed by the financial aid package (“aid,” haha), which is just a nicer way of indicating how much debt you’ll need to accumulate to pay for your degree.

It is at this moment that Americans – teenagers! — have their first encounter with the debt culture that is ingrained in the way we pay for almost everything. It’s always there, to go, to buy cars, houses, Lululemon leggings and more. US households carry more than 17 billion dollars, including credit cards.

So while we’ve normalized debt in this country, we’ve also moralized it: if we have debt we can’t pay, we must have done something very wrong.

However, we know that this is often the furthest thing from the truth. Many people accumulate debt not because of lattes, cute sweaters, and exotic vacations, but because of circumstances beyond their control, from health problems to job loss.

Then there are the structural reasons why most people take out loans, such as salaries not keeping up with the costs of education and a societal decision to place a greater burden on individuals. We should all be asking big, basic questions about how we got here – where college degrees often seem like luxury goods and medical debt often leads to bankruptcy – and what it would take to change the status quo.

For now, let’s focus on the microeconomics that is you: how to improve your credit standing, avoid debt where you can, and manage the debt you have so it doesn’t feel like it’s controlling you.

The first part of debt management is simply becoming more aware of where your money goes and spending with intention, just as Ron discussed in the third session of the boot camp.

In an increasingly cashless society, it has become easier to lose track of our spending because there is little friction – you don’t even need to take a piece of plastic out of a wallet, just tap your phone and some money is charged to your card. credit or diverted from your bank account.

Buying now, pay later apps that let you pay almost anything with an interest-free installment loan instantly subscribed to somewhere in the back of your cell phone can be equally pernicious.

View debt as a tool that you should use carefully. It can also help improve your credit profile – and you may have already done so.

In fact, people with debt who make on-time payments may already have solid credit scores, the three-digit number that lenders use to judge you when deciding whether to take out a loan (and how much interest to charge on it). Landlords often use them when considering rental applications.

But having a lot of debt can lower your score, which generally ranges from 300 to 850 – the higher, the better. (At FICO, a score above 740 is considered “very good.”)

Bottom line: Regular debt payments will help strengthen solid scores and improve less-than-perfect scores, which can lead to better interest rates later. (We’ll provide more information on how to find your scores in the action items section below.)

There are several different approaches to dealing with credit card debt:

  • Don’t forget one of the oldest tricks: the old balance transfer offer, where you transfer your debt to a credit card with a zero percent introductory rate. With interest rates on the rise, these deals are harder to find, but they’re worth a try. Make sure you look at the transfer fees (which have increased) and how much you would need to pay per month to get out of debt when the introductory fee expires.

  • Consolidating your debts into a personal loan is another option. Interest rates are almost as high as credit cards, but there is some variability between lenders, so it’s worth shopping around. You might get lucky, especially if you have a strong credit score.

  • For people with debt on multiple credit cards, the so-called avalanche method is the most practical – you focus on paying off the highest-cost debt first. Pay the monthly minimums on all your card debt (to avoid late fees). Then, put the remaining money toward your credit card balance with the highest interest rate. Once eliminated, put the extra money toward the next highest cost debt.

  • The second strategy, known as the snowball method, can be more psychologically rewarding for people who want a quicker win. Here too, you pay the monthly minimum on all your debts, but apply the extra money to the debt with the lowest balance first. The logic here? You eliminate debt faster, which can be highly motivating and encourage you to keep going.

  • Some people like to combine the two – first the snowball for a quick win, and then the avalanche.

If at any point you feel stuck, there are professionals who can help. They may even be able to negotiate a repayment plan with the credit card companies (but beware of scammers who make promises that sound too good to be true). Your safest bet is to find a nonprofit credit counseling agency through the National Foundation for Credit Counseling.

Medical debt is a little different from other consumer debt. Once you’re sure the bill is correct and your insurance (if you have one) has paid every last penny it’s owed, ask your doctor to reduce the bill to a more manageable amount, then work out a payment plan. Even if collectors are chasing you, don’t put the debt on your credit card. Here’s why: Once you do this, it will be similar to any other consumer debt.

Why is it important? The big credit reporting agencies have started to view medical debt a little less punitively. (Read an article by my colleague Ann Carrns for more information.)

If you’ve already accumulated some credit card debt but also have student loans, you’re probably wondering how to balance the two. Although federal student loan rates have increased, they are still much lower than most credit cards, which now charge an absurdly high rate of 22% on average. The same rules apply here: You want to stay current on your student loans while tackling your higher-rate debt first.

If you’re saddled with other consumer debt, there may be a way to safely reduce your student loan payments while you focus on the first one. Run your numbers on’s loan simulator, which will calculate your monthly payments under different repayment plans, along with how much interest you’ll pay over the life of the loan.

But this is a step all student borrowers should take to ensure you’re on the best repayment plan given your circumstances.

For people struggling to make ends meet, income-based repayment, or IDR, plans may be the most affordable option: They base your monthly payment on discretionary income and family size. After making payments for a certain period, somewhere between 10 and 20 years, the remaining debt is canceled.

The Biden administration’s new IDR plan, called SAVE, is the most generous version (which is why it is being challenged by more than a dozen Republican-led states). Anyone who works in public service or a nonprofit organization should also consider the Public Service Loan Forgiveness program, which can provide an even faster path to eradicating your federal student debt.

If you also have private student loans through commercial lenders, there are a few things to keep in mind. Federal student loans have built-in protections that private loans don’t — IDR programs may not require you to pay anything back if your income runs out or if you’re making minimum wage, for example, and tools like forbearance allow you to achieve temporarily pause payments. If you consider refinancing your federal student debt with a commercial lender, you’ll give up all of that.

It’s a lot to absorb. If you want help, there are experts at organizations like TISLA who can help.

The journey into your 20s is a time of self-discovery, including your financial personality. You may make suboptimal decisions that you won’t necessarily regret, but those choices will teach you. As long as the lesson is not lost, you will have gained something.

  • Your family background has likely influenced your perspective on debt. Did his family save for big purchases? Constantly borrowing for financial emergencies? Or maybe they were financially comfortable but still managed to overextend themselves? Think about how your life experience thus far may have shaped your approach to debt as an adult.

  • Make a list of all your debts, along with the interest rate you are paying on each one. Can you optimize somehow?

  • Everyone has a credit file with each of the three major credit reporting companies (Equifax, Experian, and TransUnion). Extract each of yours (using just this site, where you receive a free report from each agency weekly) and check for errors. You can dispute any errors online.

  • Do you know your credit score? There are several places to look.

  • Don’t have debts? Re-familiarize yourself with your credit card’s reward terms and interest rate – can you do better?

Ask us here.