According to the Federal Reserve’s data, only 23 percent of Americans have no debt. Of the 77 percent of people who have debt, most of them are dealing with money that’s owed on their credit cards. Mortgages, car loans, student loans, and personal loans are next in line. If you’re in the 77 percent, then it may be helpful to know that you have a lot of company. In fact, Americans’ debt has only grown since 2023. While this information isn’t meant to make you comfortable with debt, it’s a sign that you’re not alone, and it’s possible to claw your way out of it.
When planning to tackle debt, financial experts often tell you to know all the details of your situation. However, addressing debt has to go further than looking at the numbers. One way that you can start to sort out your debt is to calculate your debt load. Your debt load is how much debt you owe and is usually measured by your debt-to-income ratio.
To calculate your debt load, you need to combine the figures of all the minimum payments you are obligated to pay every month. This includes credit cards, mortgage payments, and loans, but not bills. Your debt load focuses on outstanding debts. Once you’ve added the minimum payments, you should divide this number by your monthly salary before taxes. After that, you should move the decimal point two digits to the right to get the percentage of your debt-to-income ratio.
If you have a debt load under 36 percent, then this is typical–especially if you have high debt figures like a mortgage. Having a figure over 50 percent, though, can be a sign that your load is too high and it could be significantly affecting your disposable income. You also may not be able to access other loans if your debt load is already high.
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Having a higher-than-usual debt load doesn’t mean that you can’t steadily reduce your debt, though. According to financial experts, the key is to develop a plan based on your debt-to-income ratio. If your ratio is less than 36 percent, then you can consider the snowball or avalanche debt reduction methods. With the snowball reduction option, you would put as much money as you can toward the smallest debt you have while paying the minimum on the others. When you’ve paid off the smallest debt, you would then put that money towards the next highest debt. You would continue doing this until all the money you used to pay off your other debt is now focused on wiping out the largest debt you have.
Of course, if your highest debt is costly, then trying the avalanche repayment method may be a better option for you. As the name suggests, you would pay the minimum amount on the smaller debts you have and focus extra money on drastically reducing your highest debt. The benefit of this method is that you can reduce your debt faster and significantly improve your debt load by concentrating your efforts on the highest debt. Once you’ve cleared it, you can easily pay off the remaining small ones.
If your debt is comprised of high-interest elements like multiple credit cards, though, those two options may not work well for you. In this case, you should consider debt consolidation. Consolidating your debt can make your finances less muddled because you only have one monthly payment to think about. While the interest rates of a consolidation loan will vary, you may still be able to find one that’s favourable for you based on what you’re dealing with.
A balance transfer card can be a good option to explore if you’re mainly dealing with credit card debt. This kind of card allows you to roll your credit card debt onto it, and then you have one monthly payment to deal with. A balance transfer card usually comes with a 0% interest promotional period, so you can take advantage of paying off the debt without any interest for a time. You should know, though, that a balance transfer card is usually only available if you have a credit rating over 600.
When your debt load exceeds 50 percent, you need more aggressive options than what’s been presented already. A debt management plan is a good place to start in that case. You can work with a nonprofit credit counseling agency to combine your debt so that you have a single monthly payment. Unlike previous options, you can explore this regardless of your credit rating.
If you’re carrying a lot of debt, you can try approaching the organizations you owe to reduce your debt so your monthly payments become more manageable. There are also third-party agencies that can talk to the organizations for you as well if you’re not sure how to go about it. Since you’d be paying back less than what you originally owe, though, your credit score is going to take a hit.
Finally, your last resort for settling overwhelming debt is to file for bankruptcy. While this can help with a financial reset, it will significantly damage your credit score. Before you consider it, make sure to talk to a financial advisor so you know you have no other options. Chapter 7 bankruptcy deals with debt through the liquidation of your assets, but Chapter 13 bankruptcy involves a court-approved repayment plan that can last for three to five years.
The truth is that being in debt can be emotionally overwhelming. Your anxiety, fear, and depression may only get worse when your debt is particularly high. These feelings can make you afraid of crunching the numbers, but doing that is typically the only way to see your debt objectively. It’s almost impossible to tackle your debt effectively if you don’t know what you’re dealing with.
Additionally, seeing a number and having an actionable plan can give you hope that there’s a way forward. Nothing can improve until you have a plan.
Successfully reducing your debt is meant to be celebrated, but you need to ensure that you won’t be in the same place in a few years. That means putting several things in place that build your finances in a way that keeps you debt-free.
The first step is having a comprehensive budget that focuses on your needs and increasing assets. Apart from paying utilities and other obligations, it’s a good idea to allocate money to boosting your savings, an emergency fund, and investments.
If you still use a credit card, make sure that you settle payments in full so you avoid accrued interest. Financial experts also encourage you to avoid making large purchases with your credit card that you wouldn’t buy with cash. That kind of mindset makes it less likely for you to buy items that you truly can’t afford. You also shouldn’t use your credit cards for cash advances.
Finally, it’s a good idea to stick to one credit card if you want to use one. You should also choose a credit card that has the most benefits when used.
Millions of Americans are in debt, so you’re not the only one. However, you don’t have to be stuck in it. Knowing your debt load is the best way to make the right plan for getting back on your feet financially.
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