Managing Debt Wisely: A Step-by-Step Guide

According to Experian, one of the “Big Three” credit reporting agencies, total consumer debt rose more than 4.4% from 2022 to 2023, with the most notable being “credit card debt, which saw a total balance growth of 17.4% in 2023. This increase is largely due to a 4-percentage point rise in the number of credit card borrowers who carry a balance from month to month, as well as additional retail spending.“ Other areas of debt that increased over the same period are mortgages, auto loans/leases, student loans and personal loans.

Debt is very real for many people but managing it effectively can make all the difference in your financial well-being. Whether your debt is from student loans, credit cards, or other sources, understanding how to manage it can help you reduce stress and build a healthier financial future. 

Here's a step-by-step guide to managing your debt.

1. Look at What You Owe

The first step in managing debt is to know exactly what you owe. Make a list of all your debts - credit cards, student loans, mortgages, and any other loans. 

2. Clean Up Your Credit Report

Request a free copy of your credit report from one or more of the three major credit-reporting agencies - Equifax, Experian and TransUnion. Using the reports, you can make sure you haven't overlooked any debts and that your report is an accurate reflection of your financial situation. If necessary, take the steps to clean up the report by formally closing accounts and credit cards you don’t use anymore, dispute any late payments you believe you paid on time and address any inaccuracies. Errors on the report can be disputed online, by mail or over the phone.  

3. Be Honest About Your Spending

Managing debt also involves being honest with yourself about your spending. Keep track of every spend for a month. Include bills, groceries, eating out, gas, clothes, daily coffee runs, weekly football pool - everything that you spend money on whether you charge it, use a debit card, write a check, make online bank payments, pay using Venmo or PayPal, or pay with cash, it’s still all money spent.

Review your expenses and look for ways to save. Are there subscriptions you don't use? Can you cut back on dining out or other discretionary spending? Can you stop using credit cards and use cash? Forbes Advisor cautions, 

Psychologically, it’s harder to spend cash than it is to charge or even write a check. The less debt you take on, the easier it will be to reduce what you owe.

 4. Determine Your Payments and Create a Budget

Once you've listed out your debts, determine the minimum amount you need to pay each month. Create a monthly budget. There are free budgeting tools available to help you stay on track. and many plans that can help you budget – find one that you can live with to ensure you are successful. Input your income, all expenses and minimum credit card/loan payments into your budget.

Note: If the minimum payments are more than you can afford, consider reaching out to your lenders to discuss possible options, such as extended payment terms. Work with them rather than not sending a payment.

5. Figure Out How Much Extra You Can Budget

After accounting for your minimum payments, see if you can allocate additional funds toward paying down your debt.

6. Determine Your Debt-Reduction Strategy

Finally, decide on a debt-reduction strategy that works for you. The two most popular methods are: 

The avalanche method will save you more money overall, but the snowball method can provide quicker wins that keep you motivated. Whichever you choose, being consistent is key.

7. Can You Transfer or Consolidate?

If you are currently using credit cards that have a high interest rate, consider transferring the balances to one with a low or 0% APR. Many have intro offers for the first year to 18 months on transferred balances. Make sure you look for cards with no annual fee and read the fine print before you make a change. Also, be aware of when the intro period ends and what your new interest rate will be.

Note: Put a reminder on your calendar a month before the intro offer ends to help you remember to look for a new card to transfer the remaining balance to or pay off that debt before the rate increases.

If you are consolidating credit card balances, take a hard look at your finances and ask yourself, “can I live without adding additional charges to the cards?”  Incurring more debt on the cards you consolidated is self-defeating and adds to your monthly payments. 

If you have high-interest debts, you may be able to consolidate them into one personal loan with a lower interest rate, if your credit is good. For example, a low-interest personal loan can be used to pay off credit card and car loans balances, potentially saving you money on interest.

If you're considering consolidating or refinancing student loans, carefully review your eligibility for federal loan forgiveness programs, as these could be affected by such actions. 

8. The Difference Between Good Debt and Bad Debt

While reducing debt is a goal, it’s important to know that not all debt is created equal. Surprisingly, some debts can benefit your financial situation, while others can drag you down.
•    Good Debt: This type of debt has the potential to increase your net worth or improve your life. Student loans can be considered good debt if they help you secure a higher-paying job. Similarly, a mortgage can be good debt if it helps you build equity in a home.
•    Bad Debt: On the other hand, bad debt typically involves borrowing money to purchase something that depreciates in value, such as credit card debt used to buy clothes or take vacations. High-interest credit card debt can be especially harmful to your financial health and should be paid off as quickly as possible.

9. Emergency Fund

Once you have your finances well in control, it’s time to start an Emergency Fund. This is a savings account to be used when you have an unplanned expense such as car repairs or doctor bills. Start small but be consistent. 

In time, the fund will be there to cover those emergencies you used to need to put on a credit card. A Crews Bank & Trust Personal Banker would be happy to help you set this up or you can easily set it up easily set it up online.

The Bottom Line

Managing debt is about making informed decisions and being proactive about your financial situation. By following the steps above, you can take control of your debt, reduce your financial stress, and start building a more secure future. Remember, it's not just about paying off debt—it's about managing it wisely to improve your overall financial health.

A Personal Banker at Crews Bank & Trust can help you open your Emergency Savings Account, arrange for the auto-transfers, talk to you about our credit cards and help you apply for a personal loan. 

Reach out today; we are here to help!

Loans subject to credit approval.