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Your Guide to Achieving Zero Consumer Debt—and Keeping It That Way

Does the thought of your student loan principal balance keep you up at night? Are you paying the monthly minimum on your credit cards and slowly accruing more and more debt?

By Nicole Bustamante

Getting out of debt can feel like an impossible task when you’re in the thick of it. But when you’re empowered with financial knowledge and equipped with strategies to tackle it, it can become a little more manageable. Start with this guide to consumer debt to get your finances under control (and sleep a little easier!).


Breaking It Down: The Basics


Everyone has to start somewhere, and when it comes to debt it’s important to understand the basics first. So here’s a quick rundown of the types of debt you might be juggling.


There are four main categories of debt: secured, unsecured, revolving, and mortgages.


  • Secured debt is collateralized by a good. A great example of secured debt is a car loan. The car is the good that can be taken away if you do not pay off the secured debt.
  • Unsecured debt is not held by collateral and is often thought of in the form of credit. For example, nothing specific can be taken away as collateral if you are late on making a payment to your credit card. Two other examples of unsecured debt include medical bills and some student loans.
  • Revolving debt is a recurring loan that is agreed upon by a lender and a consumer. Credit card debt is both unsecured and revolving, because each month you can charge up to a certain amount, build up debt, pay it off, and then start the cycle again.
  • Mortgage debt is when you take out loans to continually pay off your home. This is also a form of secured debt, as the home itself acts as collateral and can be taken away if payments are not made.

The Lowdown on Loan Interest Rates and Principal Payments


Another important aspect of managing your debt is understanding how debt accrues through interest rates and principal payments.


Your loan principal is the amount of money borrowed that needs to be paid back. For example, if you get a car loan for $3,000, then that is your initial principal. You will typically make monthly payments toward that initial principal (i.e. principal payments) plus interest.


In terms of the interest, the interest rate is essentially a periodic or monthly charge that must be paid for the service of borrowing money from a lender. Interest rates can vary in percentage typically depending on your credit rating and the risk of the loan. 


Interest rates can be fixed or variable. Fixed rates, which stay the same until the loan is paid off, are more common. By contrast, variable rates depend on a number of factors including but not limited to the going prime rate for loans. When you take on debt, make sure you’re reading the fine print to fully understand what your monthly payments will look like.


Three Simple Steps to Pay Down Your Debt


Once you’ve taken stock of your current debt, it’s time to make a plan to tackle it. We’ve boiled it down into three simple steps that will set you on the right track.


  • Consider ways to lower your overall interest rate.
This could mean transferring your credit card balances to one card that has a temporary interest rate of 0%, or taking out a consolidation loan. With either option, it’s important to note that you should stop charging new purchases to your credit cards and opt to pay out of pocket when possible in order to avoid accruing more debt.


  • Prioritize which debt to tackle first.

There are two popular strategies for paying off debt: you can start with the loan that carries the highest interest rate, or knock out the loan with the smallest remaining balance first.


If you choose the first route, you should pay the minimum on your accounts each month and put all the extra money you can towards the loan with the highest interest rate. Once you’ve paid it off in full, move on to the loan with the second-highest rate.


If you opt to pay off your smallest balances first, the general philosophy is similar: pay your minimums, then put all the extra cash you can towards your lowest balance until you pay it off. Knock ‘em out one by one until all of your debts are paid. 


  • Slow and steady wins the race.
You didn’t accrue your debt overnight, so don’t expect to pay it all off overnight either. Keep chipping away at your debt by continuing these practices each pay period and one day, before you know it, you will be debt-free.


Takeaways for the Long Haul


Now that you have a firm grasp on the basics and a solid plan for conquering your debt, it’s important to lay a foundation for healthy financial habits in the long term. Here are a few strategies to do just that:


  • Create an emergency fund.
Having an emergency fund means that you won’t have to dip into your savings or borrow any extra money if something unexpected happens, such as a job loss or health scare. Start by saving 2% of your income each month towards this fund, and build it up until you’ve saved the equivalent of 6-8 months of your current salary. 


  • Keep your future financial goals in mind.
As you’re considering your monthly budget and expenses, be sure to factor in major future savings for things like a home or your retirement fund. Meeting with a financial advisor may help you to manage your day-to-day spending while keeping longer-term goals within reach. 


  • Keep tabs on your day-to-day expenses.
In addition to long-term financial planning, it’s essential to maintain your weekly or monthly budget to track your expenses, purchases, and savings. That way you’re never surprised when that time of the month to pay off debt comes around. With Zip, you can pay off both one-time purchases and recurring expenses over six weeks to stay on track with your longer-term financial goals. 


Download the Zip app to check out the better way to pay and start splitting your payments in 4 anywhere you shop.

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Zip’s editorial content is not written by a financial advisor. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

About the author
Nicole Bustamante

Nicole Bustamante is a writer and journalist passionate about storytelling and the art of fashion. She has written for The Zoe Report, Angeleno Magazine, Modern Luxury Interiors California, and more in addition to writing for her personal blog.