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At its simplest, debt is defined as money owed by one party to another. But it can get complicated fast. Depending on your circumstances, debt can be a useful financial tool or baggage complicating your life.
The best way to handle your debt depends on what kind of debt you have and how much you owe. If you have too much debt, you may need to find debt relief. Just be wary of any company that over-promises or sounds too good to be true, such as debt forgiveness.
Below we break down the various forms of debt and how to handle them. Then you can use a debt payoff calculator to find when you'll be debt-free.
Secured vs. unsecured debt
There are two types of debt: secured and unsecured.
Secured debt means the borrower has pledged an asset as collateral for the loan. Auto loans and mortgages are common examples of secured debt. If you fail to repay as agreed, the creditor can seize the asset, for instance repossessing a car or foreclosing on a house.
Unsecured debt, on the other hand, is not backed by an asset. A common example is credit card debt. However, that doesn’t mean you get off scot-free if you fail to repay.
A credit card issuer, for instance, will likely sell your delinquent debt to a third-party debt collector, which may then hound you for payment. If you don’t pay the debt collector, it may sue you for payment, which can lead to wage garnishment. Some really aggressive original creditors may sue you directly, without using a collection agency.
Credit card debt
Credit card debt is among the most common — and most expensive — form of unsecured debt.
Americans' total credit card debt reached an estimated $416 billion in 2020, according to NerdWallet’s annual American household credit card debt study. Among people with revolving credit card debt, the average amount owed was $7,027.
Depending on your personal credit score, the annual percentage rates, or APRs, on your credit cards can be in the teens and 20s. Not paying off your full balance each month can get expensive, fast.
If you’re having trouble paying off your credit card debt, here are a few ways to handle it:
Medical bill debt
Medical bill debt can come from a routine visit to your doctor, or from an unexpected event like a broken bone or hospitalization. This type of debt can be expensive and, further complicating matters, there's not a clear-cut way to handle it if you can’t afford to pay it off all at once.
Here are a few ways to pay off your medical bills:
Set up a payment plan.
Use a medical credit card.
Hire a medical bill advocate.
No matter how strapped you are for cash to pay your medical bills, avoid putting the medical bill on a credit card. Most medical providers don’t charge interest; moving that debt to a credit card wipes out that advantage and can make it more expensive.
If you graduated from college in the past few years with student loan debt, chances are you’re carrying a sizable balance. On average, U.S. households that had student debt in 2020 carried a balance of $56,572.
Student loans are either federal or private, with a variety of loan types between the two. Regardless of where the debt came from, you’ll likely be paying your student loans off for years to come.
You have a few ways to get help with student loan debt:
Call your student loan servicer to discuss relief options.
Sign up for an income-driven repayment plan.
Apply for forgiveness, if you qualify.
Be wary of any companies that promise full debt relief help — many are scams.
Personal loans can help consolidate credit card debt or provide cash flow for a specific reason, like a home remodel. Loan terms are generally two to five years, with interest rates that range from 5% to 36%.
If you’re having trouble paying back your personal loan:
Car loans are a form of secured debt, meaning that if you don’t pay, the lender can take back the car that serves as collateral. Car loans are growing longer and more expensive. This can make them harder to pay off, especially if your budget is tight.
Here’s how to handle an expensive car loan:
Getting a mortgage is likely the biggest personal finance decision you’ll make. They generally last decades and cost hundreds of thousands of dollars. In 2020, the average American carried a mortgage balance of $190,595, according to NerdWallet’s debt study. A mortgage is a secured loan, meaning the bank can take your house if you don’t pay as agreed.
But you have some recourse if you’re having trouble paying your mortgage:
Debt is often a necessary part of keeping a small business running. You can take out a loan or business line of credit to hire more employees or purchase new equipment.
But too much debt can put a crimp in your business cash flow and potentially put your business at risk.
If you’re facing steep debt, there are several ways you can get your business out of debt. They include:
Boosting your sales.
Refinancing or consolidating your high-interest business debt.
It's common to have an account in collections. About 28% of consumers with credit files do, according to a 2020 report from the Consumer Financial Protection Bureau.
Knowing how to handle a debt in collections can be tricky, though. Here are some steps to follow if you’re being hounded by debt collectors: