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DIY guide to managing debt

There are many ways to improve your financial health, but if you’re looking for the muscle-building equivalent of a protein shake for your finances, you’ll want to work on getting out of (bad) debt. How much debt you carry, your credit score and your debt-to-income ratio can impact everything from where you live to which employer can hire you, so it’s worth some extra thinking. That’s why we’ve put this handy guide together for you — DIY Guide to Managing Debt.

If you don’t have credit, have poor credit, or are carrying too much debt, you might be feeling a little overwhelmed. While it won’t necessarily be a fast process, the good news is that you can climb your way out. With some good planning, a critical eye, and patience, most people can improve their debt situation within two to four years.

Keep in mind that some debt may be good debt, like when you’re building credit that helps you earn creditworthiness. Bad debt is simply too much debt compared to your available credit or income.

Managing debt and your finances greatly improve every aspect of your life. Managing your debt well can help you obtain low-interest rates on loans, leases on nice apartments, and new job opportunities. 

Can you get out of debt DIY?

You don’t necessarily need a debt service to get out of debt. What you will need is a plan and a commitment to keeping track of your progress and choices. You may need to adjust your budget (or stick to it). If you are living paycheck to paycheck now, you may need to temporarily find a way to increase your income to make extra debt payments. (We know that’s easier said than done. Check out our easy side hustles article for some ideas.) 

Should you get out of all debt? Not necessarily. Some debt can actually help your financial profile. For example, if you have a low-balance credit card that you pay off every month, it will help increase your credit score. Debt that will have the opposite effect on your credit score includes things like a credit card with a high balance that you don’t make payments on, or an upside-down vehicle loan (when you owe more than a car is worth).

Unless you are lucky enough to receive a large windfall, you’ll need a plan to get out of debt. You’ll need to create a working budget, see if you can boost your income a bit,, and figure out which debt to pay down first.

If you are working on building your credit, see our Ultimate Guide to Building Credit.

How much debt does the average person carry?

As you may expect, GenXers who are at the top of their earning potential carry the most non-mortgage debt. Young GenZers just entering the workforce hold the least amount of debt. 

According to data collected by Experian, the average non-mortgage debt in 2020 was,

Generation and AgeAverage Non-Mortgage Debt
Gen Z, 24 and younger$10,942
Millennials, ages 25-40$27,251
Gen X, ages 41 to 56$32,878
Boomers, ages 57-74$25,812

See if you qualify for a debt consolidation loan

How much debt is too much debt?

Debt can be confusing. Too much or too little debt hinders you. If you have too much debt, creditors may worry that you won’t be able to make payments if your income decreases unexpectedly. If you have carried very little debt over time and have no credit history, lenders do not know your payment habits since you do not have a history of payments for them to review.

So, how much debt is too much debt? 

Lenders estimate “too much debt” by comparing your debt payments to your income. Even if you are not currently trying to get a loan, keeping your income vs. debt in check will still help you in other ways, such as renting an apartment or signing up for utilities.

Overall, you should be aiming to keep your debt-to-income ratio at 35 percent or less. 

Keep in mind that most property management companies will not rent to you if the rent is more than a third of your gross pay. So, if you add rent and debt payments together, you should have about 40 percent of your income available after payments to be financially fit.

What is a good debt to income ratio?

Try to keep your debt-to-income ratio around 35%. To calculate your debt-to-income ratio, add up all your monthly debt payments and divide it by your monthly gross (pre-tax) income. 

For example,

  • If you earn $40K per year and have $20K in debt payments, your debt ratio is 50 percent. This is too high.
  • If you make $60K per year and have $20K in debt payments, your debt ratio is 33 percent. This is a good percentage.

If you need to improve your debt to income ratio, you need to either increase your income or decrease your debt balances (or a bit of both).

Take a hard look at your relationship with money

No matter what you learned about finances growing up or how much money you have now, it’s a good idea to frequently examine your spending habits and why you make the decisions you do (or only have the options that you have). Maybe you plan well but unexpected emergencies throw you off course. Maybe you keep track of the big things but don’t hone in on the cumulative cost of the small stuff. 

When reviewing your financial situation, you may benefit from analyzing your relationship and feelings around money. You can start by asking yourself a few simple questions,

  • Do you have a budget? If so, do you stick to it? If not, why? If not, consider creating a budget that supports paying down debt while also allowing some “fun” spending.
  • How much do you spend for convenience? For example, drive-thru dinners, disposable items, subscriptions, or cleaning services. Do these convenience expenses help you earn more or improve your quality of life?
  • Do you impulse buy or purchase items based on trends or media influences? If you find yourself frequently purchasing things you don’t really need, you may be overspending. If you need these things for creating income, can you write them off?
  • Do you spend money out of guilt or habit? Such as charity or family obligations? If so, can that spending be budgeted?
  • Are you living paycheck to paycheck? Do you have a rainy day fund? What would happen if you lost your job?
  • What items do you purchase by credit? If it is items other than a vehicle or home, you may be over-extending your use of credit.
  • Do you underspend? Do you feel guilt when buying anything for yourself or enjoying a nice restaurant meal? If so, budget some small spends to help improve your quality of life.
  • Do you think you cannot earn more money or do not deserve to earn more? If so, how can you find a way around this barrier? The easiest way to help pay down debt is to make enough to move beyond living paycheck to paycheck. 

Changing your spending habits can be difficult. You can start by creating a budget, and that budget should include paying down debt and an “allowance” for discretionary spending.

How does debt impact your credit?

Too much debt negatively impacts your credit score. At the same time, having no debt history can also negatively impact your credit score. Confusing, huh? Creditors can’t decide on your creditworthiness if they have no data, no history, to review. The best situation is when you have carried some debt and made consistent payments over time, and that your overall total balances aren’t too high. 

Financial experts recommended that you only use 30 percent of your available credit or less.

While some debt may improve your credit rating, you need to be careful. You will quickly find yourself in trouble if you acquire debt and your income changes or you lose your job. Debt payments need to be manageable even if your income changes. Building a “rainy day fund” can help you make your payments should you lose your job. Many financial specialists recommend that you save enough money to live three to six months without an income. Some of the best savings accounts even pay a bit of interest.

Is all debt treated the same? Creditors sometimes overlook some debts, such as student loans and medical bills. This is not a set-in-stone rule, but many loan companies see these types of debt as necessary rather than elective. School debt helps people earn more and medical debt is often necessitated. Medical debt is the top reason for bankruptcy. If you have school or medical debt, negotiate payment arrangements and keep making your payments to start building a good payment history.

Related article:

5 habits for staying out of debt 

Staying out of debt lowers your stress level and improves your quality of life

Earn more money to pay down debt

It may feel easier said than done, but one of the best ways to help you pay down debt is to take any additional earnings you make and put them directly towards any debt balances. For example, let’s say you have a credit card with a minimum required payment of $50. If you earn an extra $50 per month selling items online, you can pay $100 per month and pay down the debt twice as fast with minimal effort.

Here are some ideas to get you started: 

  • Talk to your manager about additional job opportunities or what it takes to qualify for a higher-paying role
  • Explore if different hours might result in a higher hourly pay rate 
  • Find a side hustle you can manage in addition to your current job
  • Sell stuff that you no longer need

When you begin to make “extra cash,” make sure to budget the money towards paying down debt, savings, and improving your credit. Check out these 20 ways to earn fast cash.

Related article:

Easy side hustles you can do after work

Do you need extra cash, like yesterday? Find easy side hustles to catch up with your bills quickly or to build your savings.

Refinance and consolidate to pay debt off faster

Another strategy that can help you pay down debt is to refinance or consolidate your loans. You may need good credit (or show improving credit) to do this, but it’s definitely worth taking a look to see if you can get lower interest rates and lower monthly payments.

Refinancing student loans

Some people benefit from refinancing student loans. Typically federal loans have low interest rates, but private loans may have a higher interest rate. Federal student loans range from 2.75% to 5.30%. Private loans often range from 3.34% to 12.99%, according to CNBC Select. If your student loan interest rate is high, you may be able to refinance your student loan at a lower rate.

Refinancing auto loans

If your car loan has a high interest rate and your credit is good, you may be able to refinance your auto loan. Some dealers offer loans when you buy a car, but they come with high interest rates of over 15 percent. The average interest rate is around five percent. If your interest rate is high and you are not upside-down on your loan, you may be able to find a lower interest rate and lower your monthly payment with a new loan.

What is debt consolidation?

A debt consolidation loan is a loan that is used to pay off multiple debts. This type of loan is often a personal loan. To be beneficial for your credit situation, you’ll need to ensure that:

  • The interest rate is lower than current loans
  • You use the loan to pay off debt
  • You keep balances low after you pay them down

How to pay off credit card debt DIY

There are four common methods for paying down credit card debt. These four debt repayment methods include snowball, avalanche, balance transfer, and personal loan.

Before creating a payment plan, you may want to make an agreement with yourself. That agreement outlines how you will use your credit moving forward. You may decide to quit using your credit cards until they are paid. Or, you may decide to carefully use a rewards card that you pay off every month.

To start, create a spreadsheet for tracking your debt information. Log in to your accounts and record your balances and interest rates. You will use this information to help you create the best repayment plan.

Debt repayment plans

Snowball method: Using this method, you pay off the lowest balance first while making the minimum payment on the others. Some like this method because they feel motivated by getting a quicker “reward.”

Avalanche method: The repayment method requires you to make minimum payments on all credit lines while paying the highest interest debt first. This method requires more patience than the snowball method but results in paying less interest.

Zero balance: You may obtain a zero or low-interest credit card with good credit that you can use to pay high-interest debts. Using this method, you’ll want to make sure you can pay the balance before the zero balance period expires. 

Personal loan: Those with good credit may acquire a personal loan with a low interest rate to pay off debt. This is a money-saving method if you are disciplined.

Whichever repayment method you choose, make sure to create a plan you can stick with and avoid adding to your debt during the process. If you receive “extra” money, such as a tax refund or overtime pay, plan on how you will utilize that money. Some choose to divide extra money into savings, debt payment, or to purchase an item on their want or need list. 

Using cash advances to avoid more debt

Using cash advances to pay off a looming debt payment can often end up costing you a lot more than you anticipated. While some newer products have emerged on the market, traditional cash advances typically carry lots of fees and very high-interest rates. Before using a cash advance service, you need to figure out if you really can afford to pay the loan back in time and if you have any other options you can leverage first.

What is a payday loan?

Payday loans are small, high-interest loans meant to be repaid when the borrower gets their next paycheck. Loans usually last just a week or two. This type of loan shouldn’t be used unless you can pay it back within a week or so in full. If it’s an option, paying a late fee or overdraft charge is often better than getting a payday loan.

Pros and cons of payday loans

FastHigh interest
Easy to qualifyShort loan terms
Online and local locationsPenalty fees

Where can I get a paycheck cash advance?

Financial services such as Varo and Chime offer this service. A paycheck cash advance allows you to access money from your next paycheck. When you are paid, you pay the loan back. These services are low-cost, but the loans are also small.

Pros and cons of paycheck cash advances

Low pricedSmall loans
Apply via an appLess take-home pay
Requires direct depositNot immediate

Needing a cash advance can be bypassed by building savings. If you live paycheck to paycheck, even a minor issue such as a car repair or vet bill can be a problem. You can avoid loans by building savings by earning more, selling items, or spending less. When you create your budget, include a plan for building up your emergency fund.

Typical renter loses over $500 per year in extra fees

Many renters lose money that they could be putting towards paying off debt instead. Some apartments wrap optional or incidental services into your rent payment. Sometimes this is a great way to save money or enjoy extra convenience. Sometimes you may end up paying for things you don’t need. 

When reviewing your lease, look for additional fees that you may be charged. For example,

  • Payment processing fees. Some property management companies will charge you to pay your rent online by credit or debit card. Fees may be a flat fee or a percent of the payment.
  • Lockout fees. If you lock your keys in your apartment, your landlord may charge you to unlock the door for you, especially after-hours.
  • Renters insurance. If you do not acquire insurance, your property managers may charge you for renters insurance via an agency of their choice.
  • Water, sewer, and garbage. Most property owners cover these fees, and some do not.
  • Maintenance fees. Some property managers charge for maintenance such as lawn care and community space cleaning.

Need a little help DIY managing debt? 

If you are confused about how to manage your debt or are having a hard time feeling optimistic or in control of your financial future, it is okay to reach out for help. You may choose to DIY and educate yourself about personal finance or you may decide to hire a professional for help.

Does debt affect mental health?

Similar to other types of stressful events, high levels of financial stress can significantly impact your ability to focus and your mental and physical health. 

And if you feel anxious, distracted, and uncertain about money stuff, you’re not alone. According to some financial studies, around 60 percent of adults feel anxious when thinking about personal finances. One of the first steps towards overcoming financial anxiety is to read up and increase what experts call your “financial literacy”. Because money stress is such a universal experience, there’s lots of great content out there, including:

  • Personal finance books
  • Finance blogs
  • Podcasts and video channels 
  • Social media finance groups
  • Money smart friends

Should I get help with my finances or DIY?

While hiring financial help may be beneficial, it can be quite costly, even further increasing your stress. If your budget is limited, start by self-educating. (There are also a number of non-profit organizations that can help you map out a strategy. Do some web searches to see what kind of organizations might offer programs near you.). Traditionally financial professionals and advisors charge $100-$400 an hour. A number of new credit help companies have entered the market like Credit People and Dovly. Check out our handy dandy comparison of credit help products and services — including a summary of how they work and how much they cost.

Related article:

Getting credit help | How to repair your credit when it’s really bad

With a bit of knowledge and commitment, you can make significant improvements to your credit score in less than a year’s time.

See if you qualify for a debt consolidation loan

No matter your current financial situation, you can take steps to make it look more like what you want. You may be able to alter some of your spending habits, build up a rainy day fund, pay down debt, create a credit history, earn a pay raise, or even work a side hustle.

To help you along the way, follow the basic credit building and debt repayment tips and find financial information resources to further build up your financial know-how. Good credit impacts every aspect of your life, including where you live, work, and mental health, so it is worth working on.

Managing debt: 7 Consumer debt FAQs

What is unsecured debt?

Unsecured debt is debt not secured with collateral. Common types of unsecured debt include credit cards and store cards. Secured loans may be secured by assets such as a home or car that can be repossessed if the borrower defaults on the loan agreement.

What is the average student loan debt?

In 2020, the average student loan debt exceeded $35,000 per borrower. Over 50 percent of students utilized student loans. 

Should I buy or lease a car?

Whether it is better to buy or lease a car depends on your financial situation. If you have poor credit, you’ll save money by skipping interest loans and lease payments by paying cash for a vehicle. If you have good credit and a high income, you may enjoy the carefreeness of leasing a vehicle.

What is a debt collector?

A debt collector is a debt recovery agency. The lender often hires them to recover a debt owed. Some buy low-priced debt and pursue payments to recoup the investment. Debt collectors are limited by state and local laws regarding how long they can sue you to collect the debt.

Can a debt collector take my stimulus or tax refund checks?

Most debt collectors can not garnish government payments. Usually, payments can be seized for default student loans, but student loan payments are currently deferred. 

What is charged-off debt?

If you default on your debt, the lender may “write the debt off “as a loss. Even though the lender closes your account and writes off the debt, they can still sell the debt to a collector or pursue the balance themselves. It takes about six months of nonpayment for the lender to charge off a debt.

Why does my credit score drop after I pay off a debt?

It is discouraging to pay off a debt only to be rewarded with a lower credit score. This happens for a few reasons. One, you are no longer making installment payments. Two, if you closed a credit account, your available credit balance may have dropped, increasing utilization. Or, if you closed an older account, the average age of your accounts may be lower. Don’t worry, it usually levels off quickly once the overall debt owed is recognized.

We are here to help you become an informed renter and to save money.

Check out these additional resources to help you meet your renting goals.

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Best checking accounts for people under 30

Find low-cost banking accounts with no fees and mobile apps. Many require no minimum balance and do not charge overdraft fees.

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How do credit scores impact my financial future?

Your credit score impacts every aspect of your life. Find out how.

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How to split expenses with roommates

Do you have roommates? Learn how to fairly split mutual expenses. 

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5 Best savings accounts

While savings accounts do not pay high interest rates these days, you can maximize your savings by carrying a balance within an interest-yielding savings account.

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When should I file bankruptcy?

If you have a lot of medical debt that you cannot pay back, it may benefit you to explore bankruptcy options.

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Why is my credit score important?

You may be wondering what a credit score is? And, why is it so important?