How easy is it to get out of debt, after all? Here’s what we found out..

Total household debt nationwide (Source)

Debt is devious. Between mortgages, credit card bills, medical bills, student loans and car payments, many Americans end up owing much more than they can handle.

This year, a third of U.S. adults carried credit card debt from month to month, with 14%  rolling over $2,500 or more, according to the National Foundation for Credit Counseling. Total household debt nationwide hit $12.3 trillion as of June 2016 — 10%  higher than 2013, according to the Federal Reserve Bank of New York.

Living on credit is near-unavoidable. It can even be a wealth-generation tool. But because debt can also be dangerous, here’s a primer on how to remove it before it becomes crippling.

USA National Debt Statistics 2016

Illustration Source – Federal Reserve Bank of New York

Good vs. bad debt

Good debt stems from investments that increase in value and help create future income. This includes mortgages, student loans, business loans and even debt that goes toward high-return stocks and bonds. It helps if the interest is tax-deductible interest and accrues at a low rate.

Bad debt comes hitched to a high interest rate and piles up via purchases that don’t retain their value. Unsecured credit card debt, store credit accounts, payday or cash advance loans, and even auto loans fall into this category.

Good Debt Bad Debt Difference

Illustration Source – Winstanley

Understanding your situation

Get a handle on exactly how much you owe. Compile financial records, including: bank statements, bills, paychecks, credit scores. On a spreadsheet, list your current debt balances and associated creditors, interest rates and minimum monthly payments. Lay out your cash flow situation, looking at recent and expected earnings and expenses. Vertex42 and SquawkFox have handy online templates.

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Creating a get-out-of-debt plan

Think about how to tackle that total payout number. Set accounts to auto pay at least the minimum amount required for each debt.

Prioritize which debts to pay off in full. The snowball method offers nearly instant gratification by eradicating the smallest balances first, then using the momentum to wipe out the larger amounts owed.

The ladder strategy attacks the balance with the highest interest rate, clears the debt, then moves to the next highest rate. This tends to save more money in the long run by shaving off the most expensive debt from your ledgers.

To see a rough payoff timeline, check out the calculator at CreditCards.com.

Adjust your lifestyle choices, shrink your spending and make whittling away existing debt the priority.

Avoid adding new debt

Adjust your lifestyle choices, shrink your spending and make whittling away existing debt the priority.

Organize your money into accounts: an emergency fund, a pot for fun, a dedicated stack account funneled into debt repayment. The Digit platform helps quietly siphon money from your checking account into a savings account. Check out other money management apps here.

Different situations need different solutions

If high interest rates are fattening your debt, ask for lower rates. Most federal loans can be refinanced, and many card issuers are also willing to re-negotiate.

Or try a balance transfer, shifting the amount owed on one account to one with a lower rate. Some credit cards even offer an introductory 0% APR feature to help with repayment. Just be sure transfer fees won’t outweigh what you’d save.

There are several ways to cover payouts using other loans, essentially clearing debt by creating more. So-called “second mortgages” are a popular form of this.

You can consolidate what you owe by taking out a single low-interest loan, clearing your other debts and then gradually paying off the lump sum. Home equity loans, which bear a fixed interest rate and regular payments, can do the trick.

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A home equity line of credit, or HELOC, is another, more flexible option. Like a credit card, it uses revolving debt. Consumers can borrow up to a certain limit, pay it off and then borrow again. But beware: HELOC lenders tend to impose high fees and variable rates that can lead to fluctuating monthly payments.

Don’t plunder brokerage or retirement accounts to pay off debt. You’ll miss out on potential market gains and also have to pay tax penalties, which might nullify the benefits of avoiding interest payments.

Debt_Relief_Options

Illustration Via Debt.org

Getting professional help

Sometimes, the debt hole is too deep to escape without help.

Reach out to the National Foundation of Credit Counseling. Many of their services are free or low-cost.But avoid debt settlement firms and bankruptcy outfits if possible.

The former are for-profit entities that engage creditors in a game of chicken. Debtors are told to stop paying their bills and instead shift payments into an escrow account, obfuscating creditors’ collection efforts to make them more willing to settle debts for less than is owed. But consumer complaints about debt settlement firms are legion, and the tax implications add an extra sting.

Bankruptcy is an alternative that should be reserved for debtors who have struggled for several months to pay basic bills. Chapter 13 bankruptcy allows consumers with regular income to repay their debts over several years. Chapter 7 wipes out all eligible debt for those without earnings but doesn’t preclude foreclosures.

How debt affects your credit

There’s life after debt, so plan accordingly. Bankruptcy and debt settlement can stain a credit report for up to a decade. Even opening a new credit card for balance transfers can ding your score.

Payment history, balance size, utilization of available credit, age of credit accounts and other debt measures play an outsize role in determining your credit score. Income is not taken into account.

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Most lenders balk when borrowers’ debt-to-income ratio exceed 40%. A higher ratio often leads to struggles with monthly payments, according to the Consumer Financial Protection Bureau.

So, if you want to keep borrowing, keep those debt levels manageable! Check out SuperMoney’s reviews of credit counseling services and credit repair options.

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