How to handle debt
Different ways to zap your debt: Which is for you?
American consumer debt has rebounded to prerecession levels, and the category that includes credit cards hit a record $1.02 trillion this summer. Maybe your credit card debt has crept up too.
It makes sense to pay particular attention to your credit cards, because their interest rates are typically higher than other types of debt, like student loans or a mortgage.
If your other types of debt are manageable, but your credit cards feel out of hand, you need to assess your situation. Then you can choose a way to handle that debt, whether it's a self-guided payoff strategy or some type of debt relief.
1 Figure out your starting point
First, take stock by: Making a list of all your credit card balances. Note the interest rate and minimum payment for each.
Comparing that debt to your income. Add up your total credit card debt and divide it by your annual income. For example, if you owe $5,000 on your cards and make $50,000 a year, your credit card debt is 10 percent of your income.
Determining what you can pay monthly. See if you can pay extra on top of your minimums.
The path you pick from here depends on your debt level and whether you can pay more than the minimums.
2 When to try DIY
If your credit card debt is under 15 percent of your income and you can pay more than the minimums, take a do-it-yourself approach.
Two common methods are “debt avalanche” and “debt snowball.” Here's how they work. Avalanche: Arrange debts by interest rate and pay off in order from highest to lowest. Keeping your focus on the most-expensive debt saves money on interest.
Snowball: Arrange debts by balance and pay them off from smallest to largest. This can give you some quick victories to build momentum toward tackling bigger debts later.
3 When to consider debt relief
Debt relief, which means getting a lower interest rate or a reduction in what you owe, can make bigger debt loads more manageable. You may need it if you're having difficulty paying the minimums or your debt has exceeded 15 percent of your income. Pick from three common options: Debt consolidation. Several debts are rolled into one at a lower interest rate, often by getting a personal loan or using a balance transfer credit card.
Debt management plan. You work with a nonprofit credit counseling agency to set up a structured repayment plan over three to five years in return for lower interest rates.
Debt settlement. Typically, a debt settlement company diverts your payments to an escrow account. As late payments mount, your creditors may agree to accept less than the amount owed. But damage to your credit is substantial.
This article was provided to The Associated Press by the personal finance website NerdWallet.