How to Reduce, Manage and Prevent Financial Debt

If you've been working hard at knocking out your debt, you know just how tough it can be. Similar to what feels like running a never-ending marathon, you might be writhing in the throes of exhaustion, overwhelm, and stress.

It might be comforting to know you're not alone. According to the Federal Reserve Bank of New York's (NYFRB) Center for Microeconomic Data, U.S. household debt ballooned to $17.69 trillion in the first quarter of 2024, a $184 billion increase from the quarter prior. What's more, 9% of credit card debt went into delinquency.

While it might feel like a long journey, staying on top of paying it off can help lower stress related to your finances. Plus, you'll have an easier time making steady progress on knocking it down. When you're debt-free, you'll have more funds to put toward the financial goals that are most important to you.

The good news? There are steps you can take today to pay off your debt, get a handle on your debt load, and steer clear of it in the future. Here, we'll go for a deep dive on exactly how.

Understanding Your Debt

First, you'll want to get your head around your debt load. To start, it's key to know the different types of debt:

Credit card debt. Credit card debt is a type of revolving debt. The card issuer gives you a credit limit, you make purchases against your limit as needed, pay it back monthly, and continue to do so as long as your account remains open. To keep your credit card accounts in good standing, you'll need to make the minimum payments each month.

The APR, or Annual Percentage Rate, on a credit card is the annual cost you pay to borrow money. Currently, the national average APR on credit cards is 21.59%. The same card will also have different APRs—for purchases, cash advances and balance transfers. Cash advances usually have far higher APRs than the standard APR. Plus, they don't have a grace period. And depending on the card, you might also need to pay an annual fee, which is typically due the month you opened the card.

Mortgage. A mortgage is a type of loan you used to buy a home, or to borrow against the value of your home that's already yours. The length of a mortgage is typically 15 or 30 years, and mortgage interest rates can be either fixed, which means the interest rate remains the same throughout the life of the loan; or variable, which means the interest rate may go up and down.

You're responsible for paying off your mortgage in fixed, monthly payments over the loan's duration. At the beginning of a mortgage, most of your payments will go toward the interest and less toward the balance. Over time, more of your payments will go toward the balance of the home loan.

Student loans. Student loans are debt you take on to pay for college or a career, technical or vocational school. They can be used to pay for qualified education expenses, such as tuition, books, room and board.

There are two main types of student loans, federal and private. Federal loans are funded by the government, and feature fixed interest rates, income-based repayment plans and the option to request a temporary pause on making payments if needed. Private student loans are offered by a lender, such as a bank or school.

Federal student loans have a grace period, which means you aren't responsible for making payments until after you leave school. The typical grace period is six months. Private student loans, on the other hand, might have a grace period. Depending on the loan, you might need to start making payments on your loans while you're still in school.

Personal loans. Personal loans are a type of installment loan where you're given a lump sum up front and are required to make the same monthly payments until the loan is paid off. Personal loans are flexible in how the funds can be used—for instance, to make home improvements or for emergency expenses.

Personal loans can also be used as debt consolidation loans. The length of personal loans are typically anywhere from 12 to 60 months, and the current average interest rate for 24-month personal loans is 12.49%.

Car loans. Car loans are debt you take on to purchase a car. Banks, credit unions, and online lenders can offer them. Like personal loans, they're a type of installment loan, and you're on the hook for making payments throughout the term.

Recent data from Experian reveals that the average loan term for a new car is more than 68 months, and the average car loan debt teeters at $23,792. Per Experian, the average interest rate for used car loans with 61- to 72-month loan terms is 12.63%.

Know your fees and rates. No matter what type of debt you're saddled with, it's crucial to have a grasp on the interest rates. The higher your interest rate and longer your term, the more expensive your debt will be. As you might expect, the quicker you can knock out your debt, the more money you'd save on the interest cost.

It's also a good idea to get your head around the terms of your debt. That way, you know what you're responsible for, and also be clued in on what might trigger fees. For instance, making a late payment, a bounced check or returned payment usually incurs fees.

Track your debt. To help you get a firm grasp on your debt situation, make use of tools and tactics to track your debt. For instance, if spreadsheets are your thing, you can use one to note the lender or creditor, type of debt, amount of debt, interest rate, payment length, and how much debt remains. You can also use debt tracker apps, which can note key details of your debt as well as your payment history.

Budgeting for Debt Reduction

Ideally, you'd like that debt to have vanished yesterday. But the reality is that you're juggling debt repayment with your day-to-day living expenses and other financial obligations and goals.

In turn, you'll want to create a realistic budget. Sit down and take a good, hard look at your financial situation. Then, factor in your income and your monthly expenses. See how much you can reasonably afford to put toward your debt. Look at the minimum payments for all your debt, as well as due dates.

Cut costs where you can. To free up more money to potentially put toward your debt payoff efforts, see where you can trim the fat in your expenses. The three major expenses tend to be housing, food and transportation. For example, with food, explore ways you can save on your grocery bill, or commit to eating out less. Peer into your pantry and fridge before you head to the supermarket. Cook with the ingredients you already have.

Find ways to earn more. To boost your earnings, ask your current employer if there are any opportunities to take on more hours at your job, or to earn bonuses or commissions. If you have the bandwidth, consider taking on a side hustle to rake in more cash.

Bolster your emergency funds. Emergency funds can prevent your debt from ballooning even more. Why's that? If you lack an emergency fund, should an unexpected expense pop up (and as you know, life will indeed throw you a curveball), you'll likely need to resort to debt to get you out of a bind. In turn, your debt hole will only get deeper.

It might seem like a tall order, but aim to stash a bit of cash toward a rainy day. If you are cutting costs, put that savings into your emergency fund. Get a small windfall from a tax refund? Put part of it toward your e-fund, too.

Popular Debt Reduction Methods

To help you crush your debt in an effective way, there are a few popular strategies to decrease your load. Let's take a look at some common approaches:

Avalanche method. The avalanche debt payoff method is where you target debts with the highest interest rates first. You throw as much cash as you can toward knocking out the debts with the highest interest rate, while making the minimum payments on your other debts. Once the balance on the highest-interest rate debt goes to zero, you focus on the next debt with the highest interest.

The main advantage of the avalanche method is that you save on interest fees. For instance, let's say you have three credit card debts with different balances and interest rates:

Credit card 1: $500 with a 24% APR
Credit card 2: $1,500 with 20% APR
Credit card 3: $1,000 with a 18% APR

You start with the card with a 24% APR, then work your way down based on the APR. Bear in mind that you'll still need to make the minimum on your other two credit cards.

Snowball method. With the snowball debt payoff method, you start with the smaller debts first. Going back to the three credit cards mentioned above, the payoff order is as follows:

Credit card 1: $500 with a 24% APR
Credit card 3: $1,000 with a 18% APR
Credit card 2: $1,500 with 20% APR

By putting your debt payoff efforts toward the smaller debts, then working your way up, you'll benefit in psychological wins. In other words, getting rid of your first debt earlier can give you a motivational lift to keep going.

Debt consolidation. When you consolidate your debt, you lump together multiple debts into a new loan and a single payment. Debt consolidation can mean a lower interest rate, lower monthly payment, or both. Note: If you're lowering your monthly payment, it also stretches out the life of the loan. This means it will take you longer to pay off your debt.

Balance transfer. Besides debt consolidation, you can also do a credit card balance transfer. This is when you move your balances from your existing credit cards to a new credit card. Usually, the new credit card features a low or zero-percent interest rate. This interest rate won't last forever, and is a promo rate that is usually anywhere from 6 to 18 months.

The goal is to pay off your balance before the introductory rate ends and the standard interest rate on the credit card kicks in, which can save you a sizable lump of cash.

Balance transfers also typically have a fee, and is usually anywhere between 3% and 5% of the transfer amount. So if you are transferring $2,000 to a new card, the fee could be between $60 and $100.

Debt settlement. When you settle your debt, you — or a third party — negotiates with creditors to pay a lump sum that is less than the full amount owed.

While it will lower your debt load and save on the cost of debt, debt settlement does damage your credit in several ways: to reach a settlement, you might need to let delinquent payments pile up, which hurts your score. Debt settlements linger on your credit report for up to seven years. Additionally, settling debt versus paying it in full is not seen in a favorable light, because the creditor agreed to take a cut on what they were owed.

Tools and Resources for Debt Reduction and Management

Being proactive in managing and lowering your debt also involves making the most of available tools and resources.

If you have questions about your particular situation or would like more hands-on guidance, consider working with a financial advisor or debt counselor who specializes in debt repayment. They can walk you through your different debt repayment options to see which one is the best fit for you.

Another option is to reach out to a non-profit credit counseling organization. You can find a directory with the National Foundation for Credit Counseling (NFCC). These organizations offer free or low-cost services, and can walk you through different routes to manage and tackle your debt.

Preventing Future Debt

Once your debts are cleared—give yourself a huge pat on the back. It's a true cause to celebrate, and cue the party hat smiley and balloon emojis.

But clearing your debt is one thing, and maintaining debt-free living status is another. To stay out of debt for good, maintain a budget and do your best to make sure your expenses don't exceed your cash flow.

Shore up your savings. Maintain a robust emergency fund—six months of basic living expenses is recommended—to ward off unexpected expenses that pop up to thwart you from a debt-free life. Use your credit cards sparingly, and pay off the balance in full each month.

Boost your financial literacy. Besides being proactive in your money management, get your financial literacy on. Sites such as the Consumer Financial Protection Bureau (CFPB) can help you bolster your financial know-how and make more informed choices.

Consider investing and bolstering your savings. Last, the sweet reward of coming out of debt is that you have the means to invest and go hard on your savings. Consider putting more into your retirement savings, investing in the stock market. Talk to an investment professional or financial advisor to help you figure out what the best route to take might be.

You Don’t Have to Manage Your Finances Alone, Let Self Lend a Hand

As you can see, you can slay the beast that is the Debt Monster. By understanding the different types of debt, choosing a debt payoff method that works best for you, and trimming living expenses and costs where you can, you can tame and eventually knock out your debt.

But you don't have to do it all by yourself. You might want to isolate yourself when you're stressed with debt. Instead, reach out and engage with financial planners and debt counselors, and focus on slowly and steadily employing these debt management and reduction tactics.

It will take time, and it won't always be easy, but maintaining steady progress and enduring will help you reach debt freedom. Any hiccups you face, you can find the tools, resources and support. At Self, we can offer you support in building your credit and savings. We also offer financial tips and information in our blog to boost your overall financial wellness. So start your journey today.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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