The Most Common Types of Debt and How to Solve Them

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Piling up debt can feel like falling into a steep ravine and trying to get out with nothing to hold on to. But there are some resources and techniques you can arm yourself with to take control (and pay off) your debt. Here’s how to get started.

Before delving into how to deal with common types of debt, familiarize yourself with the terminology used to classify debt so that you know what you have:

  • Secured debt : A form of collateral is used, such as a house or car.
  • Unsecured Debt : Has no collateral such as credit cards or personal loans.
  • Fixed Interest Rate Debt : Has the same interest rate for the life of the loan, just like a mortgage.
  • Variable Rate Debt : The interest rate can change over the life of the loan, just like credit cards.
  • Fixed maturity : The loan is repayable by a specific date, such as a mortgage or student loan.
  • Variable maturity period : there is no set date when the debt must be paid off like credit cards.
  • Franchise : This loan is used to improve your personal situation and therefore may have tax incentives such as a mortgage or student loan.
  • Tax-Free : A loan that is not used to buy valuable assets or new skills such as credit cards or a personal loan.

For more information on each of the above terms, check out this explanation from EY .

If you are dealing with debt collectors , make sure you know your rights under the Fair Debt Collection Practices Act . They are prohibited from using many tactics, such as calling you at certain times. Check if your debt has a statute of limitations that allows the creditor to sue you for an unpaid debt.

Credit cards

As painful as it may be, take an inventory of all your credit card debt. Write down how much you owe, plus the interest rate on each card. Contact each issuer and give them a detailed explanation of why you are unable to pay off your debt, then tell them what you can afford and ask them to agree to a lower amount (in writing). Nolo has more information on how to successfully settle credit card debt. You can also try to negotiate a lower interest rate on each of your credit cards. Even by simply lowering it by one point, you can significantly save the time it takes to pay off your debt.

Once you know how much you really need to pay, calculate how long it will take. Nerdwallet has a calculator that can help. This will help you set a goal schedule and also break down the repayment amount for each month. Order your cards from highest interest rate to lowest, then redeem them in the order shown. This is known as the “stack” method of debt repayment and will save you the most money in the long run.) Some finance gurus recommend using the snowball method , which pays out the lowest- value cards first, as you cut debt faster, which increases confidence and supports you, but it can cost you more in the long run in the long run. run.

Real Simple has some great advice for speeding up your repayment:

If you’re on a tight budget, pay at least monthly and then try making the same payment again two weeks later. Continue making the payment of the original minimum amount twice a month until your debt is paid off. (To keep track of, put a reminder on your calendar.)

This tactic works well if you receive a paycheck every two weeks, because you can make each payment as soon as your paycheck goes into your account (no excuse to put it off!). If you’re not getting paid on a bi-weekly schedule, try saving enough money from each paycheck to make two minimum payments a month.

As you pay off your credit card debt, you must work hard to avoid additional costs. Seriously evaluate your expenses, make up for yourself a budget and stick to it. If you need to, limit yourself to paying in cash only until you know you can always afford to pay off your credit card balance in full every billing period.

Medical bills

If you’ve ever been hospitalized or even just visited an emergency room, you know that medical costs can rise quickly. Dealing with health care debts is difficult because you don’t feel like you can really refuse treatment even if you can’t afford it. Your first step in managing your medical bills is to carefully check them for errors. Make sure you actually use all the services that are charged. With just one wrong keystroke in the hospital, you suddenly pay for something completely different from what you received.

In addition to identifying errors and pointing them out to the hospital, you can also try to lower your medical bills .

If you are feeling overwhelmed by the process, NerdWallet offers several resources that you can use to get help with your medical debt:

In terms of repayment, Debt.org invites you to try paying off other smaller debts like credit cards so that you free up more money for your medical bills.

Mortgage

Whether you’ve recently taken out a mortgage or repaid it over the years, there are ways to reduce it and save you money. Making an effort to pay off your mortgage ahead of time is motivating because you will get more security for yourself and your family (no one can take your home) and free up more money to pay off other debts or increase your savings.

About.com has several suggestions for reducing mortgage payments:

  • Refinance your mortgage. This can lower the interest rate you pay on your mortgage and save you money in general. About.com recommends doing this if you have a new mortgage, as most mortgages pay more interest at the beginning and more principal at the end.
  • If you own 20% or more of the shares in your home , make sure you are not paying for Private Mortgage Insurance (PMI). Often times, if you have a mortgage but do not own 20% of the shares, you will also have to pay for PMI. Ask the lender if they removed this since you now own 20% or more of the shares.
  • Increase the terms of obtaining a loan. It may sound counterintuitive, but it lowers the amount you have to pay each month, which helps if you ever run out of funds. Of course, you can still stick to your original payment amount while on a lower plan, which will help pay it off faster.
  • Fight the tax assessment. Many mortgage payments include property taxes, which are determined by your county. Getting a new appraisal can lower your property taxes if the home’s value has dropped since the last appraisal. If the value of your home has risen, your taxes could rise, so think carefully about this before taking action.

As with other types of debt, plan to pay off your mortgage as quickly as possible. Any time you get an increase in income – even if it’s a short-term one, like a bonus or tax refund – consider applying it to your debts.

Student loans

Unfortunately, education arrears are becoming more common among young people. On the positive side, there are more ways to reduce your student loans than other types of debt, including forgiving government service loans and volunteering in exchange for paying off your student loan . You can also use the Department of Education’s Repayment Estimator Tool to find out how long it will take for you to clear your student loan debt.

If you take a few steps to plan ahead, you can avoid future student loan debt. Try some of these resources to fund future educational activities :

  • Scholarships: Usually awarded based on financial need or academic achievement. Even if you apply and get a few smaller scholarships, it’s still money that you don’t have to go into debt for. You can find scholarships using search tools like Fastweb .
  • Grants: Very similar to scholarships, although they are often provided through an organization or government such as Federal Pell Grants .
  • Work-Study Programs: You work part-time in jobs organized under the Federal Work-Study Program, and your earnings go towards paying for education costs.
  • Before going to college or graduate school, take the time to work to save money and soften the impact of your loans.
  • Create passive sources of income so you can afford to pay for at least some of your tuition.
  • Set aside your loans: Essentially, your situation (eg, military service, unemployed, etc.) is preventing you from repaying your loans at the moment. You can use this chart to find out if you are eligible for a student loan deferral.
  • Try income-based repayment: If your loan payment constitutes a significant portion of your earnings, you may qualify for the income-based repayment program. Basically, the amount you pay is adjusted so that you don’t spend most of your cash flow on student loans and don’t have enough money to live on. You can find out more about the different plans and whether you are eligible on the Federal Student Aid website .

Student loans can be especially tricky because you might not know what you were doing when you borrowed them. Apply some of the previously mentioned tactics, such as budgeting to save more to pay off, or making multiple payments each month to reduce your student loan debt as soon as possible.

When it comes to debt, you have a lot to think about, and you may have a lot of work ahead of you. Before filing for bankruptcy or paying off a debt , make sure you are aware of the possible consequences for your future. You can always use resources such as credit counselors or financial advisors .

Debt dealing can be stressful, from the stake or guilt you may feel to unpleasant interactions with creditors. However, you can use the tips above to improve your situation and expand your financial capabilities.

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