Resolution 2025: Get Rid of Bad Debt

As you may have read, we’re wrapping up the year by helping you think big-picture about your financial health. The goal is to make it easy for you to evaluate, and maybe even lay the groundwork for a New Year’s resolution or two. To that end, we’re dedicating one article to each of the three main aspects of your finances: spending, debt and investing for your future. Up today, debt.

As stressful as it can be to owe money, debt is a very conventional part of American life. When used responsibly, it can be an important tool to help you achieve milestones like owning a home.

But some debt has the opposite effect. The interest you owe can become a slippery slope, pushing your balances ever higher and derailing your financial goals completely.

If your debt is overwhelming you, the first step is to determine which type of debt is the problem. Good debt includes loans you took out as part of an investment in your future: a mortgage on your home or a loan for a college degree, for example. Bad debt, on the other hand, usually leaves you with little to show for it. The things you used it for may have depreciated in value — or just led to more debt. The best example of this is high-interest credit card debt.

Next, take an inventory of everything, including credit cards, car loans, personal loans, student loans, mortgages and medical debt. Note the balances, interest rates, and minimum payments.

Then, consider how you might be able to extricate yourself. The avalanche method, where you focus on paying off the debt with the highest interest rate first, usually makes the most financial sense, but there are other options too. In the debt fireball method, you concentrate on the bad debt first, and in the snowball method, you hone in on the smallest balance first. (This last one has more of a psychological benefit, giving you momentum and a sense of accomplishment.)

You may also want to explore refinancing your loans at lower interest rates, getting a debt consolidation loan, or as a very last resort, seeking a debt settlement.

So what? Debt gets a bad rep, but it’s not always bad for you. When it is, don’t lose hope — there are ways to get out from under. And remember, bad debt doesn’t exist in a vacuum. Usually it stems from a mismatch between your spending and income. So take the time to examine any non-essential expenses. If you can pay off more debt by cutting back, it’ll be well worth it in the long run.

Related Reading

•   Dear SoFi, I’m Overwhelmed by Debt. Can You Help Me? (SoFi)

•   Debt Management Guide (Investopedia)

•   Paying Off Debt Is the Hardest in These States: Survey (News Nation)

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