Debt Management: How to Manage Your Debt

Effectively managing debt is important for staying in control of your finances and building credit. Managing your debt starts before taking out a loan or getting a credit card. Here are three steps for managing your debt:

  • Analyze your budget before taking on debt
  • Research interest rates and compare them across banks
  • Stick to your budget and be aggressive

If you missed these steps, you can take the following steps to understand your debt and take control of your finances:

  • Figure out exactly how much you owe—including interest rates and loan terms
  • Create your own debt management plan
  • Consider debt settlement

Debt Management: Part One

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Analyze your budget before taking on debt

You have to know how much debt you can afford, so take time to look at your monthly income and spending. See if there are ways you can cut back on expenses or eliminate some altogether. 


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If you find that you can’t afford as much debt as you anticipated taking on, start saving monthly. Having some savings will allow you to make a bigger down payment, which will reduce your monthly payment amounts. Having some savings can also make it easier to make monthly payments if you opt out of a down payment.

It’s also important to think about why you’re taking on debt and what the pay-off will be. Is this something that can wait while you save more? Do you need it now?

Research interest rates and compare them across banks

Interest makes you pay more than the initial cost. Your credit score, debt-to-income ratio, and credit history are among the factors that affect the interest rates you can qualify for. Sometimes there are differences across banks, so see what your bank has and look at other options to find the best loan option for you.

Stick to your budget and be aggressive

Once you’ve taken on debt, stick to your monthly payments. If possible, pay more on your loan than your regular monthly payments. While spending your extra cash on debt isn’t fun, it will reduce the total amount of interest you pay and save you money in the long run.

Debt Management: Part Two

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In an ideal world, everyone would be in a position to take the first three steps. However, some may not have considered debt amounts, interest rates, and repayment plans before taking on debt. Even the best financial planning can go awry with unexpected circumstances, like job loss, major health issues, and natural disasters.

In these cases, there are still several things that you can do to take control of your finances and get out of debt.

Figure out exactly how much you owe—including interest rates and loan terms

Make a list of all your debt. Include the type of debt (credit card, loan, payday loan), interest rate, and debt amount. The total amount might seem daunting, but this information is key to making smart decisions to get yourself out of debt.

Review the loan terms for each debt. Check to see if there’s a prepayment penalty or another part of the agreement that will affect how you pay off debt. 

Depending on the interest rates for your personal loans, it can make sense to consolidate or refinance them by taking out a personal loan. If you can qualify for a lower interest rate by getting a personal loan, that can go a long way in making it easier to pay off your debt faster. More of your monthly payment will be going towards the principle of the loan and less to interest. It also consolidates monthly payments into a single payment, which is convenient.

Create your own debt management plan

Once you know what your debt looks like, the next step is to create a plan to pay it off. Plan to make at least the minimum monthly payment on each of your debts. For larger payments, you can prioritize your debts by interest rate or loan amount

Prioritizing by interest rate is a good idea because the longer you have that debt, the more interest you’ll have to pay. Once this debt is paid off, you can put the money used for that monthly payment towards your next highest priority debt. This is called the avalanche method.

Prioritizing by debt amounts can be a good idea because starting with the smallest debt can help keep you motivated to continue paying down debt. This strategy is called the snowball method.

When you set your monthly budget, make debt repayment a priority. Setting and sticking to your monthly budget will help you put your debt repayment plan into action.

Alternatively, you can work with a credit counseling or debt consolidation company to develop a debt management plan. While there are some fees associated with debt consolidation companies, it can be helpful to have only one monthly payment and someone to hold you accountable.

Working with a financial advisor can help you figure out ways to manage your finances even after you’re debt-free. Good credit counseling, debt consolidation, and debt settlement companies offer free consultations. Take advantage of these to ask questions and figure out how to best manage your debt and future finances.

Consider debt settlement

Debt settlement companies and lawyers negotiate with creditors to reduce your total amount of debt. Debt settlement companies charge a percentage of the total enrolled debt for their services. The rates are regulated by state governments but typically range between 15 and 25 percent.

Debt settlement companies have their clients set up a new bank account and make monthly contributions to it instead of making monthly payments to creditors. Over time, the account grows and is used to make settlement payments once a deal is reached. 

Because debt settlement clients stop making monthly payments, their credit score falls. Once the process is over, it’s important to rebuild your credit. A credit repair service can help you do this.

Additionally, settled debt is marked as “settled” on your credit report instead of paid in full. The forgiven debt is also taxable, so be prepared for when you file taxes.

Debt settlement can be a good option in some circumstances, but it’s important to weigh the cost and effect on credit before choosing settlement.

The Bottom Line

Managing debt starts before you take it on. Plan how much debt you’re going to take on and make sure it fits in your budget. Once you have debt, stick to your plan to pay it off. When you can, make higher monthly payments to lower the total amount of interest paid.

If your debts have piled up, take time to look at each debt and its interest rate. Once you know this information, it will be easier to make a plan to pay it off. Determine which debt is your highest priority—either by size or interest rate—then put extra money towards paying that debt. Once it’s paid, keep doing the same thing until all of your debts are paid off.

Credit counseling services and debt consolidation companies can also help you create a debt management plan and take control of your finances. In some situations, debt settlement companies are advantageous because they negotiate your debt down. However, settlement negatively affects your credit score and shows up on your credit report.

Knowing your options and available resources will help you stay in control of your finances, be smart about debt, and live debt-free.

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Alice Stevens
 Alice Stevens is a language enthusiast, loves history, and enjoys traveling. She manages content for Best Company specializing in finance, insurance, and car warranty.
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