In the world of money management, debt is seen by many as a challenge to navigate, but if you’re dealing with debt, it’s important to remember that you’re not alone. As of the second quarter of 2023, Americans owed $1.031 trillion on credit cards, according to LendingTree. This number isn’t just a statistic—it’s a sign that debt is a common issue.
A recent survey by Bankrate found that nearly half of Americans are in a tight spot financially: 22% of people have more credit card debt than money in their savings, and 13% have neither credit card debt nor savings.
Let’s take a closer look at how to deal with debt if you’ve overborrowed.
Recognizing the Signs of Overborrowing
Overborrowing is common, and it’s crucial to recognize the signs across various types of debt:
The dream of homeownership can turn into a nightmare if monthly payments become unsustainable, especially if the mortgage exceeds the home’s value. This can happen when housing markets adjust or if a person’s income decreases unexpectedly.
For many recent graduates, the pressure of student loan payments can be overwhelming, especially in a challenging job market. If you’re struggling to find a job that pays well enough to cover your student loan payments, it may be a sign that your educational debt is too much to handle. This is especially true for graduates who are entering a weak job market or have degrees that don’t commonly lead to high-paying jobs.
New cars lose value quickly, often dropping significantly in price within the first few years—so if you’re paying off an auto loan for longer than the car’s value retention period, it means you’ll end up owing more than the car is worth. This is a common sign of overborrowing that can put you in a difficult financial situation.
If you’re constantly reaching your credit card limit or struggling to make the minimum payments, it may be a warning sign that your credit card debt is getting out of hand and that you’re spending more than you can afford.
Taking Out New Loans to Pay Off Existing Debt
This is often characterized by a series of balance transfers onto new credit cards, personal loans or refinancing options that don’t ultimately reduce the principal debt, but rather extend the repayment period or even increase the overall interest paid. While debt consolidation can be a useful strategy when done correctly, repeatedly taking out new loans to pay off existing debt can be a risky pattern. It may provide temporary relief, but without a change in spending habits or an increase in income, it may lead to greater debt.
Identifying these signs is the first step toward regaining control of your finances. Instead of resorting to temporary fixes that may worsen the situation, it’s important to tackle these issues proactively. If you’re considering taking on a new loan to consolidate existing debts, you may want to pause and thoroughly evaluate your overall financial strategy. Seeking guidance from a credit counselor or financial advisor can provide valuable insights and help you develop a plan to manage your debt effectively and pave the way for financial stability.
Strategic Steps to Overcome Debt
The first step in overcoming debt is to acknowledge it’s there in the first place and prepare to take action. Accepting that you have debt is not a sign of weakness or failure—it’s a sign of strength and courage that you’re ready to take control of your finances.
Let’s get into some possible next steps:
- Take Full Financial Inventory
Understanding the extent of your debt is essential, especially with credit card balances that increase quickly with interest over time. Know what you owe, the interest rates and the minimum payments. This will serve as the foundation for your debt repayment plan, ensuring you tackle them with full knowledge of their impact on your finances.
- Create a Budget
Budgeting is your roadmap toward debt freedom, requiring you to carefully examine and potentially reduce expenses. This involves evaluating your spending habits, identifying areas where you can save and making informed decisions to prioritize debt repayment over other expenditures. Budgeting isn’t about deprivation—it’s about making conscious choices that align with your financial goals. By understanding your spending patterns and making adjustments, you can effectively work toward debt repayment while still enjoying what makes you happy.
- Prioritize Your Debts
Paying off high-interest debts first can save you a significant amount of money over time. This strategy, known as the ‘debt avalanche method’, involves focusing on paying down your highest-interest debts first while making the minimum payments on your others.
This approach is beneficial because it may help you reduce the total amount of interest you pay on your debt. By paying off your highest-interest debts first, you can free up more money to pay off your remaining debts faster.
- Debt Settlement
Communicate with your creditors to explore your options. Creditors are sometimes open to discussing debt relief options, especially if you have a history of making on-time payments and a good credit score. This could involve hardship programs, debt settlement or a simple reduction in your interest rate.
- Debt Consolidation
You may want to streamline your debt management with consolidation. With aggregate credit limits reaching new heights, debt consolidation can offer a simplified and potentially more cost-effective approach to debt repayment. This involves transferring multiple credit card balances to a single card with a lower interest rate or taking out a consolidation loan to pay off several debts, resulting in a single monthly payment. By consolidating your debt, you may gain a better understanding of your overall financial situation and develop a more manageable repayment plan.
- Seek Professional Guidance
Seeking professional advice is a smart move if you’re feeling overwhelmed by debt. Credit counselors can help you develop a realistic plan to get out of debt and stay out of debt. They can also provide the support and accountability you need to stay on track. With delinquency rates on the rise, it’s clear that many people are struggling to manage their debt—and credit counselors can provide personalized support and guidance to help you navigate out of debt and achieve financial stability. They may also assist you with budgeting, developing debt management plans and even negotiating with creditors on your behalf.
- Boost Your Income
With total household debt exceeding $17 trillion, increasing your income can be a powerful tool to help you get out of debt faster. Every extra dollar you earn can be put towards paying down your debts and reducing the amount of interest you’ll pay over time. There are many ways to increase your income, such as getting a part-time job, starting a side hustle, or investing in passive income streams.
Stay Motivated and Celebrate Small Victories
Nearly half of cardholders with debt anticipate at least a year to pay it off, so setting short-term goals and acknowledging the progress you make can provide the encouragement needed to continue on the path to debt freedom.
Work to Prevent Future Debt
With credit availability on the rise, learning from past experiences is important to avoid future debt. Create and stick to a budget, try building an emergency fund to cover unexpected expenses, and keep making informed decisions about your credit use.
Empower Yourself with Financial Knowledge
Educating yourself on credit and debt management is one of the most powerful tools you can have to achieve financial freedom. By understanding how credit and debt work, you can make informed financial decisions—the more you know about personal finance, the better equipped you’ll be!
Use Technology to Your Advantage
Budgeting apps and online tools can help manage debts, including auto loans and student loans, which have seen significant increases. These tools can help you stay organized, make payments on time, and even find extra savings.
What to Do if You Overborrowed
If you find yourself struggling to manage your debt, it’s important to understand your options. Each type of debt may require unique approaches to manage and eliminate it.
For those facing mortgage payment challenges, refinancing or modifying your mortgage can provide a lifeline. Refinancing allows you to secure a lower interest rate or extend the loan term, potentially reducing your monthly payments. However, it’s important to carefully consider the long-term financial implications, including closing costs and the overall interest you may pay over the life of the loan.
If refinancing isn’t an option, you may try exploring a loan modification. A loan modification involves changing the original terms of your mortgage to make payments more manageable. This could include lowering your interest rate, reducing your monthly payments or extending your loan term.
Student loan debt can be particularly overwhelming due to its commonly large size. Federal loans offer several relief options, such as deferment, forbearance and income-driven repayment plans—which can adjust payments according to your income level. For private loans, refinancing may be a way to lower interest rates and monthly payments, though this often requires a good credit score and stable income.
Auto loans may pose challenges due to the rapid depreciation of vehicles’ values. If you’re facing difficulties with your auto loan payments, consider exploring options like refinancing or trading down to a more affordable vehicle. Refinancing can potentially lower your interest rate or extend the loan term, which would reduce your monthly payments. Trading down to a less expensive vehicle may also significantly lower your monthly expenses.
Credit card debt, notorious for high interest rates, may often be managed through debt consolidation loans or balance transfer credit cards with lower rates. These strategies may simplify your payments and potentially reduce the amount of interest you pay over time. It’s important to have a clear repayment plan in place to avoid falling back into high-interest debt.
Explore Debt Settlement
If you’ve exhausted other strategies to manage your debt and are still struggling to keep up with payments, debt settlement may be an option to consider as a last resort. This involves negotiating with creditors to pay a lump sum that is less than the full amount owed. While debt settlement may provide significant relief from overwhelming debt, it’s important to approach it with caution and understand its potential impacts on your credit score and financial stability.
Before considering debt settlement, it’s important to explore all other options, such as refinancing, debt consolidation or working directly with your creditors to find solutions. Consulting with a financial advisor or credit counselor may provide valuable guidance on whether debt settlement is a good option for you and help you understand the potential consequences and benefits.
Overcoming debt requires a strategic plan, informed decision-making and unwavering determination. It’s a journey towards a brighter financial future, one step at a time. By taking control of your finances, seeking expert guidance when needed and staying informed, you can effectively manage your debt and achieve your financial goals.
Remember, the path to debt freedom isn’t just about eliminating obligations—it’s also about building a sustainable financial foundation that supports your long-term aspirations. Treat each step forward as a victory and let your progress be your motivation.