Six Ideas on How to Manage Debt

Episode 307 – According to an estimate by Experian, the average American adult holds $6,501 in credit card debt. Is there a way out? Here are six things that you might want to try.

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Transcript of Podcast Episode 307

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, six ideas on how to manage debt.

In today’s economy, you don’t have to be a big spender to feel overwhelmed by how much you owe. You’re certainly not alone. As of late last year, the average American adult held $6,501 in credit card debt, according to an estimate by Experian.[1] This is up 10 percent from the previous year. And credit card interest rates can be as much as 20 percent, or even higher.

Once you’re saddled with a significant amount of debt, there is rarely an easy way out. But if you’re in that situation, here are six things that you might want to try. The idea is to get your debt under control before it has more serious consequences for your financial health.

1. 
   
2. Audit your spending. Have you looked carefully at your car insurance or homeowners insurance? Are you taking advantage of all the available discounts? Would a higher deductible or a different insurer suit your needs? What about your discretionary spending on things like online subscriptions? If you look closely enough, you may find “holes” that you can fill, leaving you more money to pay down your debt.
   
3. Pay off the high interest debts first. This is sometimes referred to as the “avalanche method,”[2] although it could also be described as simple common sense. The higher the interest rate, the more it will cost you in the long run. And with credit cards, if you pay less than you spend from one month to the next, the amount you owe can accumulate quickly and take a long time to pay off. So, it makes sense to pay off the higher interest debts as soon as you can.
   
4. Consolidate your debts. Speaking of credit cards, there’s something you can do even if you can’t afford to pay them off right away. A debt consolidation loan could help ease some of that burden. There are two common ways to consolidate your debt: Personal loans and transferring your existing credit card balance to a new card with a lower—or zero—interest rate.[3] But remember that zero interest rate offers are for a limited time only, often 12 to 21 months.[4] Either a personal loan or a zero interest offer can save a lot of money, but you do have to qualify.
   
5. The “snowball” technique. Another popular idea is to pay off the card with the smallest balance first. Once you’ve repaid the balance in full, you take the money you were paying on that debt and use it to help pay down the next smallest balance. Then just keep repeating the process. The idea is that when that first debt is wiped out, you have more resources available to address the next one. Thus, the rate at which you’re paying down your debts keeps growing, like a snowball getting larger as it rolls down a hill.
   
6. Pay more than the minimum. This one should be obvious, but you might not realize how powerful it truly is. Let’s say you owe $5,000 on a credit card with a 20 percent interest rate. If you just pay $100 per month on that balance, it will take more than nine years to pay it off. But if you increase the payment to $200 per month, you’ll reduce the payback time to less than three years.[5] But that’s only half the battle, of course. You’ll also need to avoid accumulating more debt in the process.
   
7. Sell things you no longer need. Baby boomers may remember what life was like before eBay. It’s a whole lot easier to get rid of stuff you don’t need—and bring in extra cash—than it was back in the 80s. Besides eBay, there are lots of other sites that can help you raise money by getting rid of items you no longer have any use for.
   

One final note. Owing money to someone else is not always such a bad thing, and living debt-free is not always the best choice. You need to look at the details of the debt itself. For example, if you bought a house a few years ago with a 3 percent mortgage and tax-deductible interest, why would you hurry to pay it back? You may be able to get a better rate of return simply by keeping the extra money and investing it.

[1] Horymski, Chris. “Average Credit Card Debt Increases 10% to $6,501 in 2023.” Experian.com.
https://www.experian.com/blogs/ask-experian/state-of-credit-cards/ (accessed October 21, 2024)

[2] Sherman, Emily. “6 Easy Ways to Pay Off Debt.” usnews.com.
https://money.usnews.com/money/personal-finance/debt/articles/easy-ways-to-pay-off-debt (accessed October 21, 2024)

[3] Frankel, Robin Saks. “5 Steps To Take Now To Save More And Reduce Debt.” Forbes.com.
https://www.forbes.com/advisor/personal-finance/steps-to-take-to-save-more-and-reduce-debt/ (accessed October 18, 2024)

[4] Coleman, Sara. “The pros and cons of 0% APR credit cards.” Bankrate.com.
https://www.bankrate.com/credit-cards/zero-interest/pros-cons-of-zero-percent-apr-cards/?tpt=b (accessed October 21, 2024)

[5] Sorter, Amy. “7 tips to help dig your way out of debt.” Bankrate.com.
https://www.bankrate.com/personal-finance/debt/ways-to-get-out-of-debt/?tpt=b (accessed October 18, 2024)

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