5 Strategies for Properly Managing Debt

While debt can be useful in certain situations, it can quickly spiral out of control. To pay off your balances and get back on track, the right debt management strategies are key. Depending on your unique situation, the methods you use might vary, but everyone can benefit from creating a plan and understanding the options and tools that are available. By staying informed and proactive, managing debt becomes a structured and achievable goal. And once you learn how to properly manage your debt, you'll have the flexibility to work toward other financial priorities.  .

If you want guidance on the best way to manage and prioritize your debt, consider seeking out a financial advisor for help.

1. Prioritize Debt Payments

Effectively managing debt starts with prioritizing payments . Begin by listing all your debts, including the interest rates and balances for each. High-interest debts, such as credit cards , typically take precedence over lower-interest debts because they accumulate interest quickly and are more expensive over time. By focusing on these accounts first, you can reduce the total interest paid and potentially pay off your debt faster. This strategy, known as the debt avalanche method, helps you reduce your debt burden more efficiently. With this strategy, you make minimum payments on all your debts while throwing any extra money toward your highest-interest debt until it's paid off.

Another way of prioritizing payments, which some people may prefer, is the snowball method . This method involves paying off smaller debts first to gain quick wins and build momentum. This psychological boost can motivate you to continue paying off larger debts.

Regardless of the method you choose, consistency is key. Set up automatic payments to make sure you never miss a due date, which can help you avoid late fees and additional interest. Regularly review your debt repayment plan to help you stay focused and track your progress.

2. Pay More Than the Minimum Due

Paying more than the minimum due on your debts is one of the most effective strategies for eliminating debt. Paying only the minimum due keeps you in debt longer. That's because minimum payments primarily cover interest, and only a small portion goes toward the principal balance. By paying more than the minimum, you directly reduce the principal, which in turn reduces the amount of interest you'll owe over time. This approach accelerates debt repayment and can save you significant amounts of money in interest charges.

Consistently paying more than the minimum can also improve your credit score . A lower balance relative to your credit limit positively impacts your credit utilization ratio, which is a key component of your credit score. This improved credit score can lead to better interest rates on future loans and credit products, minimizing your debt burden in the future.

To make a bigger dent in your debt payoff, allocate a portion of any extra cash, whether it's a tax refund, a bonus or a raise, toward your debt repayment. By consistently paying more than your minimum amounts, you'll make visible progress toward shrinking your debt.

3. Consider Debt Consolidation

Debt consolidation is an option worth considering for those looking to simplify their debt management and potentially reduce their interest rates. This process involves combining multiple debts, such as credit card balances, personal loans and other high-interest obligations, into a single loan with a fixed interest rate. By consolidating your debts, you can streamline your monthly payments into one manageable amount, making it easier to keep track of due dates and reduce the risk of missed payments. Debt consolidation often results in a lower overall interest rate, which can save you money over the life of the loan and help you pay off your debts faster.

Before consolidating debt, consider whether it's the right choice for you. While debt consolidation can simplify your financial situation, it’s not a solution for everyone. For instance, you may need a good credit score to qualify for a favorable interest rate on a new loan. There are also fees to consider. And don't neglect the behaviors that led to accumulating debt in the first place. Without changing your habits, you risk falling back into debt even after consolidation. A financial advisor can provide personalized advice and help you weigh the pros and cons of debt consolidation to make a decision based on your unique circumstances.

4. Build an Emergency Fund

Creating an emergency fund is a crucial step in maintaining financial stability and making sure you can keep up with debt payments even during unexpected situations. An emergency fund acts as a financial buffer, providing a safety net for unforeseen expenses such as medical emergencies, car repairs or sudden job loss.

By setting aside these savings, you can avoid missing debt payments , which can lead to late fees, increased interest rates and a negative impact on your credit score. Your emergency fund can also prevent you from taking on more debt. When you have savings to fall back on, you can pay for emergency expenses with cash rather than taking on additional debt.

Financial experts typically recommend saving three to six months’ worth of living expenses in your emergency fund. While it may take time to hit that goal, consistent contributions can help. Consider setting up automatic contributions to a dedicated savings account so you can build your emergency fund without having to think about it. You can also look for ways to reduce discretionary spending and direct those savings toward your emergency fund.

5. Don’t Close Accounts Unless You Have To

Closing a credit account can have unintended consequences on your credit score . One of the most significant impacts is on your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. When you close an account, you reduce your overall available credit, which can increase your credit utilization ratio and potentially lower your credit score. A higher credit utilization ratio indicates to lenders that you might be overextended, which can make it more difficult to qualify for loans or favorable interest rates in the future.

Closing an account can also affect the length of your credit history, another critical factor in your credit score. A longer credit history can benefit your credit score, so your oldest accounts are important. Closing an account you've had for a long time may result in your score dropping.

However, there may be times when closing an account is worth it. For example, if the temptation of available credit is too much to resist, closing an account may be worth the temporary credit drop.

Bottom Line

Managing debt isn't always easy, but the right strategies can help. Start by prioritizing debt payments based on the amount or interest rate and when possible, pay more than your minimum payments. Remember, managing debt is an ongoing process that benefits from regular review and adjustments. Get support from a financial advisor for personalized insights and accountability, so you can stay on track and achieve long-term your long-term goals.

Tips for Financial Planning

• Working with a financial advisor can help you create a long-term financial plan that can improve your ability to reach your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
• If you’re interested in seeing how your investments could grow over time, consider using SmartAsset’s free investment calculator .

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