Managing debt to your advantage

While most people would be thrilled to live a life without debt, borrowing money isn’t always bad news. It can open up opportunities like a college education or make it possible to afford larger purchases like a new home or car. It can even make for a nice night out or a wonderful weekend away.

Challenges can arise, though, when debt isn’t taken on responsibly or managed strategically. A recent Corebridge survey revealed that personal debt is one of the top reasons people feel held back from being financially capable. Not surprisingly, nearly one-fourth (22 percent) of these same individuals wish they could be an expert in debt management.¹

With that in mind, it’s important to understand the different types of debt, the basics of debt management, and strategies for making sure debt is a help not a hindrance.

Understand different types of debt

On the surface, debt is - simply described - borrowed money. Dig a little deeper, though, and there are significant differences – and understanding these differences can help individuals make informed decisions about choosing the most appropriate form of debt for a particular need or goal. It can also help with creating a budget, managing cash flow, and building a healthy credit profile. 

Let’s take a closer look.

Secured debt – This type of debt is backed by collateral, which is an asset that the borrower pledges to the lender as security for the loan. If the borrower fails to repay the loan, the lender has the right to take back the collateral.

Examples of secured debt are things like a mortgage or auto loan. 

Unsecured debt – Unlike secured debt, there is no specific asset that the borrower uses as security for an unsecured loan. Instead, the lender approves unsecured loans based on the borrower’s creditworthiness, income, and financial history. 

Credit cards and personal loans are common examples of unsecured debt.

Revolving debt – As the name implies, revolving debt refers to an arrangement where the borrower is granted a maximum limit they can borrow, but they can continue to borrow as long as they stay below the borrowing threshold and make at least the minimum payment. 

Credit cards and personal lines of credit are forms of revolving debt. 

Installment debt – This type of debt is repaid over a specified period through scheduled payments. It is usually used for larger purchases where the borrower needs to make fixed, predictable payments over time. 

Common examples include auto loans, student loans, and mortgages. Thinking of buying a home? Use this mortgage calculator to see what your monthly payments might be based on your purchase price, loan amount and interest rate.

Learn about the basics of debt management

Effective debt management involves several fundamental principles. Here are some basics.

Know what you owe – It may sound like a no-brainer, but a really important step to effectively tackling debt is to know what you owe. You’ll want to take note of the loan type and length of loan (if applicable), as well as the balance, interest rate, and minimum monthly payment. It might also be helpful to understand the total cost of each loan if you just made the minimum payments. 

One way to stay on top of this information is by creating a spreadsheet Having all this information in one place provides a clear view of your overall debt picture. It also allows you to keep track of your debt as it shrinks, providing a nice visual of your progress. 

Understand the impact of interest – The best way to understand the impact of interest is to consider a real-life example … like buying a TV. Let’s assume you purchase a TV for $475 using a credit card with 22 percent interest and a minimum monthly payment of $24.64. In this scenario, that $475 TV would really cost $591.41 when all 24 monthly payments were made. You would have paid an additional $116.41 in interest. Said another way, the price of the TV went up about 24 percent.

Know your minimum payment amount – Almost all creditors require a minimum monthly payment, but it’s up to you to know the amount … and to make sure your payment is at least that amount. It can be helpful to set up automatic monthly payments for at least the minimum amount, so you don’t accidentally miss a payment, which can result in penalties and affect your credit score.

Understand the benefits of paying more than the minimum – While making the minimum payment is a solid first step, there are significant benefits to paying more than the minimum. Use this credit card payoff calculator to see what it will take to pay off your credit card balance, and what you can change to meet your repayment goals.

For installment loans, like mortgages, student loans, or car loans, paying extra each month against the principal can make a real difference in reducing how long it takes to pay it back and how much you will have paid over time.  You can also achieve this by making extra payments whenever you can – just make sure you indicate that extra payment dollars are applied to your principal balance versus interest.

Know your credit score – Your credit score plays a significant role in the interest rates you might qualify for when seeking a new credit card, loan, etc. Understand, too, the factors that influence your score. According to Experian – one of the major credit bureaus - a credit score is impacted by factors such as payment history, total debt, usage of available credit, length of credit history, credit mix and new credit.

Make on-time payments – Timely payments are crucial for building and maintaining a positive credit history. Late payments, on the other hand, not only result in fees and penalties but can also lower your credit score. If you struggle in this area, be sure to set up reminders or schedule automatic payments to make sure your loans are paid on time.

Choose a paydown strategy

As you consider which paydown strategy is best for your situation, give yourself a pat on the back. You’re about to set your repayment plan in motion … and start moving closer to debt freedom. That’s a huge step forward.

Snowball method – Think of this approach like a snowball rolling down a hill. It starts small and then gets bigger as it keeps going. Similarly, in this approach, you tackle your smallest debt first. Once that small debt is paid off, you start paying the next smallest. And so on. The method can help you to see progress quickly, giving further motivation to keep going.

Avalanche method – With the debt avalanche method, you order your debt by interest rate, with the highest interest rate first. The strategy here is to pay minimum payments on every other debt except the debt with the highest interest rate. Then, once the debt with the highest rate is paid off, you move to the one with the next-highest interest rate.

Debt consolidation – Like the name implies, here you take multiple loans and combine them into one larger loan with an overall lower interest rate. Although the main goal is to reduce the interest paid on your loans – ensuring more of your hard-earned money goes toward the principal - simplicity is an added advantage. Having one payment instead of 2, 3 or more may make it easier to stay on track and on time with your payments.

Get creative

In addition to understanding debt basics and selecting a paydown method, there are other ways to make your money work harder. 

Explore student loan forgiveness – If you have federal student loans, explore loan forgiveness options: 

Income Driven Repayment (IDR) – An IDR plan bases your monthly payment on your income and family size. If you repay your loans under an IDR plan, any remaining balance on your student loans will be forgiven after you make a certain number of payments over 20 or 25 years. Be sure to check out one of the newest IDR plans, the Saving on a Valuable Education (SAVE) Plan.

Public Service Loan Forgiveness – If you work full time for a government or non-profit organization, you may qualify for forgiveness of the entire remaining balance of your Direct Loans after you’ve made 120 qualifying payments. As part of its Student Debt Solutions program, Corebridge has engaged Savi (a social impact technology firm) to help non-profit and public service workers take control of their student loans. The goal is to improve and simplify the experience by providing an end-to-end digital process that helps:

• Determine qualification for student loan forgiveness
• Identify potential savings
• Navigate through enrollment
• Maintain eligibility
• Provide a clear path to applying for full forgiveness

Other options – The Department of Education offers additional forgiveness programs for healthcare workers, teachers, and people with disabilities. Learn more here.

Negotiate with creditors – If you’re having trouble making payments, consider contacting your creditors. Some may be willing to lower your interest rate, waive fees, or work out a more manageable repayment plan. The odds of getting a “yes” aren’t 100 percent, but it does help if you have a history of on-time payments. If you do negotiate a lower rate, think about continuing the same payment amount so you can pay down the loan even faster.

Look for special rates when purchasing large items – For example, if you need to purchase an appliance or make an update to your home, such as a new roof or windows, there may be loan programs or credit cards that offer zero percent interest for a certain time frame, such as 12 or 18 months. This gives you time to pay off the purchase without incurring additional interest charges – of course, always be sure to read the fine print carefully!

Avoid accumulating new debt – While working on repaying your existing debts, try to avoid purchases that would add more to your debt total. For many, this is a really hard step. But if the goal is to get rid of your debt, adding more expenses is counterproductive. So, as you think about what you buy, try to distinguish between what you want and what you need. And if you’re able to cut your spending in a certain area, be sure to redirect the money you’re saving toward one or more of your debts.

Sell unnecessary assets – Again, this might be a challenge, but selling something you no longer need or want can help generate extra funds to pay down your debt.

One more step to consider 

According to a recent Corebridge survey², those who work with a financial professional are nearly twice as likely to feel confident in their ability to plan for a successful future than those who don't (53 percent versus 28 percent) and are more confident in their ability to manage financially day to day (63 percent versus 44 percent).

While it’s possible to achieve debt freedom on your own, having a trusted financial professional by your side can help make sure your approach is the best one for your specific situation … and provide insight on how to set financial goals, manage debt and still save for the future.