Dealing with Debt
From Financial Literacy
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The CT Department of Higher Education, in partnership with UConn and CPTV, has created a new online program, "Who Wants to Be Financially Responsible?" to educate students about money management in an interactive game format. Check out Episode #3: Debt Management for more information on this topic. |
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Dealing with Excessive Debt
Similar to 12-Step Programs, admitting you have a problem is the first step to recovery. Let your Debt-to-Income Ratio be a guide. Most sources recommend that you should not have debt payments that exceed 20% of your net income (what you make after taxes). If you are exceeding this amount, then you may be putting yourself at high financial risk.
Remember that psychology class in which you learned about Elizabeth Kubler-Ross and the stages in the grieving process? If you find yourself in a situation where you are unable to easily manage your debts, you may go through similar stages such as:
- Denial: “I can’t deal with it, so I won’t even think about it. Maybe I’ll go shopping to feel better…”
- Anger: “I can’t believe I bought those expensive shoes. I am so stupid!”
- Bargaining: “Please God, if you let me win the lottery to pay off my bills, I promise I’ll never overspend again!”
- Depression: “It’s so bad…There’s nothing I can do…I’ve messed up my life forever…”
- Responsibility & Action: “I will work hard to make a Personal Financial Plan, stick to it, pay off my debt, and feel in control of my future!”
All stages are normal, but Responsibility & Action should be your goal!
Start the Responsibility & Action phase by developing a Personal Financial Plan (PFP). A PFP documents your income and prioritized expenses. Supplement your PFP with concrete steps toward your short and long-term financial goals. These steps might include:
- Reducing your expenses (see Living Expenses for ideas)
- Eliminating costs for services and items you really don't need
- Do an honest "Needs vs. Wants" assessment
- Finding ways to increase your income (e.g., an additional part-time job)
Methods for Paying Down Debt
There is no single solution for managing debt that will work for all people. However, if you want to pay off your debt faster, you will need to make more than the minimum monthly payments. Check out the minimum payment calculator at http://www.webwinder.com/wwhtmbin/java_cci.html . This tool compares the time it will take and total interest you will pay if you make only the minimum payment versus other, additional payment amounts on your debt.
Developing a Personal Financial Plan is the first step to dealing with excessive debt. Once you have your PFP, you may want to consider one of these methods for identifying which debts to pay off first. Remember that you should always make at least the minimum payments each month to all your creditors.
The "Roll-Down" Method:
This method may save you a significant amount in interest payments, potentially reducing the total cost of borrowing. This approach might work particularly well if the interest rates on your debt accounts differ considerably.
- Identify minimum payments for each debt
- Identify extra amount you can apply to debt each month
- Apply extra payments to the debt with the highest interest rate first
- Once the debt with the highest rate is paid off, apply extra payments to the next-highest-interest debt
The “Fast Progress” Method:
Maybe you need more immediate gratification to stick to your financial plan. This method may also work well if the interest rates on your debt accounts are similar.
- Identify minimum payments for each debt
- Identify extra amount you can apply to debt each month
- Apply extra payments to debt with smallest balance
- Once the debt with the smallest balance is paid off, apply extra payment to the next-smallest debt
Tips for Dealing with Debt
| Instead of... | Try this... |
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| Making the minimum payments on each debt each month |
Commit to making more than the minimum payment on at least one debt account each month
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| Making installment payments past the due date with added fees | Always pay bills on time
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| Using your credit card or taking personal loans to pay for unexpected expenses | Start a savings fund for emergencies
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| Using "payday" and "title" loans as a quick fix to pay off debt | Make a Personal Financial Plan or seek consumer credit counseling if you need assistance
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| Becoming so overwhelmed with your debts that you do nothing | Seek help from reputable non-profit consumer credit counseling agencies |
If You Feel Totally Overwhelmed
If the sections Personal Financial Plans (with its budgeting process) and Goal Setting (with suggestions for prioritizing and planning) did not offer a solution to you, Don't Give Up! Try one of these ideas:
- Contact your creditors/ lenders about repayment options. Many are willing to work with you to prevent you from becoming delinquent. Read about options for student loan repayment in Repaying Student Loans.
- Some companies may have special programs for debtors who are having temporary financial troubles.
- Remember that extending payments over a longer period will increase the total cost of your loans/purchases
- Consider consolidating debt
- Remember that extending payments over a longer period will increase the total cost of your loans/purchases
- Remember that extending payments over a longer period will increase the total cost of your loans/purchases
- Contact NON-PROFIT consumer credit counseling services such as the National Foundation for Credit Counseling:
- 1-800-388-2227
- http://www.nfcc.org/
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Disclaimer: Nothing on this website should be construed as authoritative financial advice. Your circumstances are unique and you may want to consult a financial advisor. The authors of this website are not financial planners.
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