5 Shame-Free Ways to Tackle Your Debt
“Don’t talk about money at the dinner table.”
This and other money-related taboos have made addressing debt and personal finance struggles a shameful prospect. But with over 65% of Americans unable to manage their finances, it’s clear that juggling debt is a shared experience.(1)
Most of us are going through it. Instead of living under the weight of hiding financial woes, we could feel empowered just by talking to our neighbors.
Getting out of debt can feel like an impossible task when you’re in the thick of it. But understanding you’re not in this alone is hurdle number one. Once you let go of shame, you can equip yourself with financial knowledge and strategies to tackle debt head-on and achieve financial fearlessness.
Start with this guide to consumer debt to get your finances under control (and sleep a little easier!).
Breaking it down: the basics
If step one is breaking the taboo, step two is understanding the basics. Everyone has to start somewhere, and when it comes to debt it’s important to understand the main types you might be managing. Here’s a quick rundown of the various kinds of consumer debt.
There are four main categories of debt: secured, unsecured, revolving, and mortgages.
- Secured debt is collateralized by a good. The lender runs a credit check to make sure debt has been handled responsibly in the past, but if you default on this loan the lender has the added security of being able to seize the assets detailed in your agreement. 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. Because there are no personal assets attached to an unsecured student loan, failure to pay can result in legal action and judgment, including wage garnishment.
- Revolving debt is an agreement that enables the borrower to use up to a certain amount on a recurring basis. 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. Recurring loans can be unsecured as well. An example of this would be a home equity line of credit.
- 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.
These might seem scary, but it’s crucial for you to understand the stakes of the debt you own so that you can prioritize and take action. Applied knowledge = power.
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.
Five money moves to manage 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 five simple steps that will set you on the right track.
- Write it down and talk about it.
We covered this a bit, but taking the time to outline your debt and perhaps talk about it with a friend not only helps to keep the shame away, but can also help you prioritize goals and hold yourself accountable. And with intuitive personal finance apps, this can be a lot easier than you think.
Be sure to include your credit report in the mix. Requesting a free copy will help you gain a comprehensive view of what you owe and can alert you to accounts you don’t recognize and may be able to dispute.(2)
- 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. If you have a good credit score and payment history, you could also give your lender a call. Advocate for yourself and try negotiating for a lower interest rate. The worst they can do is say no. And if they say yes? What a nice kickstart to help you reach your goals.
With any of these options, 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.
- Take advantage of student loan repayment freezes.
The student loan repayment freeze that was put into effect during the pandemic is slated to end in May 2022, but President Biden is considering an extension. You can use the remaining respite to help divert money toward more pressing high-interest needs, like credit card debt. If you’ve already done that and have steady income and ability, consider allocating money toward paying down student loans during this 0% interest period.
- Prioritize which debt to tackle first.
There are two popular strategies for paying off debt: the avalanche and snowball methods. The first means you can start with the loan that carries the highest interest rate, while the second involves knocking 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 toward 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 toward 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.
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 time 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.
- Keep your future financial goals in mind.
- Keep tabs on your day-to-day expenses.
Feel financially fearless
When you face your personal finance fears, you become your most valuable asset. No matter your financial standing, be kind to yourself. Getting rid of shame and debt doesn’t happen instantly, but with the tips outlined above, you can begin to build confidence and form healthy habits to achieve all of your future goals.
Footnotes
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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.
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