Get the facts

The first step to handling any problem, and excessive debt is no exception, is to focus on facts. In regards to managing your debt, focusing on the facts means finding out how much debt you really have, what kinds of debt you have and what the monthly payments and interest costs are on your debt.  This post is the third article in my series about debt.  The first article introduces you to your credit report and the second goes into detail on the FICO score that you will get back when you request your credit report. 

Armed with your credit report and FICO score, you’ll be able to have the pieces to put together a ‘debt inventory’ of the accounts you have open, balances you are carrying, minimum payments on each account and, with a little extra work, the interest rates you are paying on each account.  Doing the work to find out the interest rates on your various accounts is optional in taking your ‘debt inventory’, but will allow you to more easily prioritize which accounts you should pay off first.You may be surprised how many people are troubled by debt problems, but haven’t done the work to calculate how much monthly interest they’re paying to service their debt.  Part of the problem may be that they really don’t want to know and, considering how much it sometimes is, one can hardly blame them.

Research your interest rates

Fears and denial aside, the first step back to financial health is a good diagnosis.  Call your creditors, check your latest statements online, or dig up your most recent paper copy of your credit/loan statements to determine the interest rates on your various accounts.  If you’re paying $200 per month in interest charges alone on a monthly net income, say, of $4,000, then you are paying 5% per month of your income for essentially nothing.  It’s not entirely nothing, since you are enjoying the things you bought early (instead of saving and purchasing with cash), but you should be honest with yourself and question whether being able to make those purchases early is worth 5% of your income.

When that $200 a month becomes the total you can pay each month, you have reached a point where you will never pay off the debt.  If all the money is going to interest, none is going to principal.  Some sources say paying the minimum payment on credit cards often takes around 8 years to eventually pay off the balance…thats IF your credit card company even requires you to pay any principal every month, some don’t.  Take a look at a past statement and consider how much of the monthly payment goes toward interest versus repayment of principal.

Suppose it’s 90% interest, 10% principal. That’s approximately the case for the average home loan for the first several years. You can use an online calculator to see how long that will take in your situation.


Suppose, for example, you owe $10,000 at 7%.  You could pay only $116 per month, but it would take you 10 years to pay it off.  The interest would cost you $3,933 - almost 40% of the total amount.

Debt Repayment Techniques

Now that you’ve seen your situation, you need to take two further steps. Develop a budget that will allow you to make payments as large as you can handle to get the bills paid off.  If you have several accounts, you could use the ’snowball method’ (I’ll post a future article on the details of this approach) and pay off the smallest one first. Then apply what you were paying to the smallest to the next smallest (now the smallest), until you’ve reached the end.  This ’snowball approach’ quickly builds up your payments each month and will allow you to start to tackle even some of the largest debts in your ‘debt inventory’.  If you only have one loan or credit card, fancy debt repayment techniques aren’t necessary, just pay off as much of the debt as you can afford each month.  Make it hurt if you need to, you’ll be glad you did in the end when you are debt free!


The alternative to the snowball approach is to just take on your largest debt first. That would save you the most in dollar for dollar interest each month (though other accounts may have higher interest rates), but it’s hard for many people to stick to this approach when they see such slow progress.  Start simple, snowball to kill off your smallest debts first.  You’ll see progress, build discipline, and rapidly start to build up your snowball to tackle your larger balances.

Stop Taking On New Debt


Now, for the hardest - and most important - step of your debt management process (which should be carried out simultaneously with the first)…stop borrowing. You should not allow yourself to incur any further debt until you have gotten your existing debt under control.  That ‘reasonable level’ varies on your types of debt and your own will power.  Make sure to make steady payments so you can see progress.  Making progress will boost your desire to further control your debt levels and having the desire to do it will motivate you much more than any article or book will ever do.

Facing reality and making a commitment to long-term change are the two hardest things for anyone who has entered financially turbulent waters to do, but honesty about your situation and a plan for controlling it are critical if you want to recover your financial health and independence.