Simple Strategies That Help With Debt

Prudent utilization of credit is a means to make purchases that may otherwise be unaffordable. For many people, debt financing is essential to buy a car, a home or a college education. However, excessive borrowing can easily ruin your credit profile and prevent you from saving money and investing for retirement.  

That said, there are a few strategies that can help you reduce your debt load and better manage your finances. Two of them are outlined below.

Debt Consolidation

If you have multiple sources of debt, such as a few credit cards, a personal loan, an auto loan, a mortgage and student loans, you may benefit from debt consolidation. Debt consolidation entails taking out a new loan to retire multiple existing loans.  

Debt consolidation makes the most sense when you can achieve a lower interest rate on the new loan than the weighted average rate charged on the existing loans. It’s even more worthwhile when the new loan term is shorter than, or equal to, the weighted average term of the existing loans. Achieving both structural modifications can guarantee a lower long-term cost of borrowing.  

Beyond the economic benefits of a lower rate and/or shorter term, debt consolidation also helps simplify the process of getting out of debt. A single loan is easier to manage than a handful of loans with varying terms and conditions.

Debt Negotiation

If you’re unable to pay a debt, a well-timed negotiation may work in your favor. This is especially true for medical debt. For example, let’s assume you have a costly medical procedure that is not fully insured and you’re left with a $10,000 bill — and zero wiggle room in your budget.

In this situation, your debt is inevitably going to age, and after 60 to 90 days, medical providers are likely to step up the collections effort. If you’re approaching the end of the calendar year and can scrape together a chunk of money (perhaps, a few thousand dollars), many providers will accept a partial payment to clear the $10,000 debt in its entirety. For them, it can be more appealing to get what they can from you and close the year without carrying your troubled debt on their financial statements.  

I’m not suggesting you lie to a lender or misrepresent your financial position. Rather, be cognizant that when faced with difficult circumstances, a strategic approach can be beneficial to all parties involved.

Debt consolidation and debt negotiation are two of the most popular strategies for simplifying the debt repayment process. Employing these strategies effectively along with reforming the spending habits that may have gotten you into debt in the first place can set you on the path towards achieving financial wellness.