06 Debt Management
Learn how to organize debts, choose a repayment strategy, compare borrowing costs, and respond to financial or legal difficulties.
Organize debts and payments
Begin by listing each debt's balance, , minimum payment, and due date. Note whether it is secured by property, such as a car or home. Compare what you can afford with essential expenses and required payments.
Choose a repayment strategy
When possible, make at least the required minimum payment on every debt. Direct any extra money to one target debt; after paying it off, add its former payment to the next target.
The targets the debt with the highest first. When payments and other terms are comparable, this generally reduces total interest. The targets the smallest balance first. Paying off an account sooner can provide motivation, but it may cost more in interest if higher-rate debts remain unpaid longer.
For example, if you owe 500 dollars at and 2,000 dollars at and have extra money after making both minimum payments, the targets the 2,000-dollar debt, while the targets the 500-dollar debt. Choose an approach you can follow consistently, and check loan terms for fees or prepayment restrictions.
Compare borrowing costs and risks
Assess the , not just the payment amount. Check the , fees, repayment schedule, and consequences of missing a payment.
A can carry very high fees. A common example is a fee of 15 dollars per 100 dollars borrowed for two weeks, equivalent to an near . Rollovers can add fees while leaving the original balance unpaid. Before borrowing, consider asking a creditor for more time, checking lower-cost options through a bank or credit union, or seeking help from a reputable community organization.
Be cautious with consolidation loans and debt-settlement offers. A lower monthly payment may result from a longer repayment period, added fees, or collateral requirements. Compare the total amount repaid and understand what happens to existing accounts before agreeing. Avoid companies that guarantee to erase debts or demand payment upfront for promised debt-relief results. Review the contract and verify services independently.
Act early when finances change
If your income drops or you expect to miss a payment, act early.
Review your budget and due dates. Identify available money after necessities and determine which payments are most urgent. Consider the consequences of falling behind on housing, utilities, or secured debts.
Contact the lender or service provider promptly. Explain the situation and ask about hardship options, such as a temporary reduced payment, a due-date change, a fee waiver, or a revised plan. Ask how the arrangement affects interest, fees, credit reporting, and the account. Get the terms in writing, and do not agree to a payment you cannot sustain.
Seek trustworthy help if needed. A credit counselor can review your budget and explain options. A may combine payments and may involve creditors agreeing to lower rates or fees, but it does not erase debts. Confirm participating creditors have accepted the plan before sending payments, and check fees and terms first.
Handle collections and legal concerns
Verify unfamiliar debts and dispute errors through the proper process. Handle collection notices and court papers carefully. If sued, respond by the deadline in the court papers; ignoring a lawsuit can lead to a . State laws and deadlines vary, so seek legal aid or a qualified attorney when needed.
For severe, persistent financial distress, consult a qualified nonprofit counselor or attorney about available options, including whether merits consideration. In the United States, individuals generally must complete approved credit counseling before filing for , subject to limited exceptions.