Choose your own adventure: 4 strategies to get out of debt
- July 6, 2023
- 5 min read
What we'll cover
Difference between “good” and “bad” debt
Quiz to find a path to becoming debt free
Things to do after paying off debt
Debt comes in many shapes and sizes. Sometimes you take on debt purposely, other times it slowly creeps up on you or hits you all at once. But no matter how or where it comes from, most can agree: Debt can be stressful and reducing it isn’t always so simple.
One way to think about the various effects of debt is categorizing types by “good” and “bad.”
Some “good” debts are designed to help you invest in your future. Think student loans (which can be a major investment into your earning potential) or a mortgage (which allows you to build equity and grow wealth long-term). “Good” debt is typically paid back over an extended term with relatively low interest rates.
Meanwhile, “bad” debt is typically taken on for expenditures that will decrease in value, leaving you paying interest charges without building equity. This type of debt may be taken on in the form of credit cards that tend to have high annual percentage rates ( APR ), which can make paying down your balance take longer and cost more over time.
Interest charges can make debt expensive, essentially taking money from your future paychecks and making it harder to save for your goals. Taking on more debt will likely increase your debt-to-income ratio , making it tougher to qualify for loans you may need, such as a mortgage. Additionally, if debt begins to negatively impact your credit score, loans you do qualify for may come with higher interest rates all around.
|Simple to start using||May cost you more if your highest balance also has super high interest|
|Small wins can boost your motivation and keep you going|
|Saves money on interest||May need extra money to put toward debt|
|Structured approach to paying off debt||Could be difficult to stay motivated because it may take a while to fully pay off the first balance|
|Simplifies debt because you will only have one monthly payment||May face high upfront fees|
|Could secure a lower interest rate||Could come with a higher interest rate than what you currently pay on your debts|
|On-time payments could increase your credit score||Need to be eligible|
|Simplifies debt because you will only have one monthly payment||Creditors may not agree|
|Could secure a lower interest rate||May be required to close one or more credit accounts|
|Can get advice from a professional||Could hurt your credit score|
You may also consider creating spending buckets, a feature of Ally Bank’s Spending Account . You can have up to 30 spending buckets to track anything from groceries to bills and more. You decide how much money is needed for each bucket and how often. Spending buckets make it easy to track where your money is going and to see how much you have left over.
Reducing debt may feel like an uphill battle. Committing to a strategy, staying focused and knowing you aren’t alone can help. With persistence and an eye on your target, you’ll see the debt you once viewed as a mountain turn into a molehill.
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