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Debt, by definition, is money owed by one party to another, often with interest. Borrowing money has benefits and drawbacks.
Debt with a lower interest rate that helps pay for something valuable, like a home or college education, can strengthen your financial position and help you reach your goals. Borrowing money and paying it back on time also builds credit.
However, if too much of your monthly income is going toward debt payments — say, more than about a third — it can get tough to pay everything off.
Debt can mount during difficult economic times. According to NerdWallet’s annual American household credit card debt study, 53% of Americans who currently have revolving credit card debt say necessities contributed to the debt.
Understand the terms and types of debt to help you navigate your financial life. Let’s get into it.
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Common categories of debt
There are two main categories of debt:
Secured debt means the asset you're paying for (a home or car, for example) is collateral. Fail to pay, and the creditor can take it back via repossession or foreclosure.
Unsecured debt, on the other hand, is not backed by an asset. Credit cards, student loans and medical bills are examples of this type. While creditors can’t come take your stuff with these forms of debt, they can initiate collections efforts and eventually sue you for payment. This can lead to wage garnishment.
There's also installment vs. revolving debt:
Installment debt is a loan that you pay over time with fixed payments, like for a home or car. The lower the interest rate, the better.
Revolving debt refers to debt with payments that vary from month to month, likely with higher interest rates. Credit cards are the most common example, where your payment depends on how much you spend up to a certain limit. Pay you bill in full each month to avoid a revolving balance with regular interest charges.
Other terms to know
- Principal: The amount borrowed.
- Interest: The cost of borrowing, typically charged by the lender and paid by the borrower.
- Annual percentage rate (APR): The yearly cost of borrowing, including interest and fees.
- Collateral: An asset used to secure some types of loans.
- Debt consolidation: Combining multiple debts into one debt.
- Default: Failure to pay.
- Delinquency: Late payment.
Good debt vs. bad debt
Some forms of debt can be viewed as more worthwhile than others. Student loans and mortgages with reasonable interest rates are often considered good debt because they help people attend college and purchase homes.
On the other hand, high-interest debt or debt that stems from general overspending could be viewed as bad debt. Credit card debt could be an example of this.
» Learn more: What is bad debt?
Common debt types
Credit card debt
Credit card debt is among the most common — and most expensive — forms of unsecured debt.
Americans' revolving credit card debt reached an estimated $676.29 billion as of December 2025, according to the NerdWallet study. Among people with revolving credit card debt, the average amount owed was $11,149.
If credit card debt is weighing you down, consider these payoff strategies:
- The debt snowball method, to knock out your smallest loan first, then move on to the one with the next smallest balance. This can provide quick wins for real motivation.
- The debt avalanche method, to tackle the loan with the highest interest rate first. Then, you move on to the one with the next highest. This can help reduce the amount of interest you pay overall.
- Don’t rule out relief options if your debt feels overwhelming.
Medical debt
Medical debt can come from a routine visit to your doctor or from an unexpected event like a broken bone or hospitalization. It can be expensive and 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.
- Negotiate the balance down.
- Hire a medical bill advocate.
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 makes it more expensive. Not only that, medical debt is subject to some preferential treatment by the credit bureaus that you’ll lose if you convert it to regular credit card debt.
Student loans
If you graduated from college in the past few years with student loan debt, chances are you’re carrying a balance. On average, U.S. households that had student debt as of December 2025 carried a balance of $56,098.
If you need it, there are 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
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 seven years, with interest rates that range from about 7% to 36%.
If you’re having trouble paying back your personal loan:
- Call the lender to see if you can defer payments or go on a hardship plan.
- Consult the free help of a nonprofit credit counselor to better manage your budget.
- Talk with a bankruptcy attorney if you’re facing too much debt.
Car loans
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.
Here’s how to handle an expensive car loan:
- Downsize your car for a cheaper one.
- Lease a less expensive car.
- Talk to your lender if you’re in danger of missing payments.
Mortgage
Getting a mortgage is likely the biggest personal finance decision you’ll make. They generally last decades and can cost hundreds of thousands of dollars. As of December 2025, households with mortgage debt carried a balance of $233,580, on average, according to NerdWallet’s debt study.
If you’re having trouble paying your mortgage, you do have options:
- Consider refinancing your mortgage.
- Seek a loan modification or forbearance period.
Business debt
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, consider refinancing or consolidating your high-interest business debt.
» Next up: Read stories of people becoming debt-free
Meet MoneyNerd, your weekly news decoder
So much news. So little time. NerdWallet's new weekly newsletter makes sense of the headlines that affect your wallet.
