5 Types of Debt and How to Pay Them Off

If you have debt, you’re not alone. Debt is quite common, and there are many types for various purposes. That said, managing debt may feel overwhelming or create undue financial stress. Each type of debt has unique challenges and payoff strategies and tactics. Knowing these can help you make a plan. To help you out, this article explains five debt types and how to pay off each one.

1. Credit card debt

Credit card debt has no fixed repayment date, lets you carry a balance, and has high interest rates. Many are unsecured, meaning no collateral is required. These three features may lead to you carrying balances month-to-month, accruing interest with an indefinite monthly payment. This often happens due to emergencies or overspending. Two strategies can help you pay off credit card debt, depending on your preferences:

• Debt snowball: Pay off debt from your lowest to highest balance. This helps you pay off the first card faster to build momentum, but may cost you more in interest.
• Debt avalanche: Pay off debt from your highest to lowest interest rate. This saves more on interest, but takes longer to build momentum if the first debt is larger.

Other ways to reduce credit card debt include:

• Debt consolidation and refinancing: Use a loan or balance transfer credit card to streamline debts and reduce interest rates, saving money and time.
• Outstanding rewards points: Put all outstanding rewards points toward your credit balances. This may not be a lot, but it can help shave a few dollars off your balance.

2. Student debt

Student debt can help you obtain an education and start a higher-paying career. However, this debt has increased dramatically over the years.¹ Even government-backed loans may feel overwhelming. Federal student loans may offer various programs to help with debt:

• Income-driven repayment: This can reduce your monthly payment to be more in line with your income, although it could prolong your term which ultimately drives up the total cost of the loan. 
• Forgiveness programs: These may forgive (meaning eliminate) any remaining federal student loan debt for employees in specific industry or who meet other criteria.
• Deferment and forbearance: These can pause your payments temporarily if needed, although interest may accrue on loans in forbearance. Interest may not accrue on deferred loans.

Private loans may offer fewer options and demand immediate repayment (unlike the grace period offered by federal loans). However, you can still do things like:

• Consolidate and refinance
• Inquire with your lender about hardship deferment

Finally, for both loan types, you may be able to use educational tax credit refunds to help reduce the loan amounts if you qualify. Similarly, student loan interest may be tax deductible.

Also check: Dischargeable Debt in Chapter 7 Bankruptcy

3. Medical debt

Medical debt occurs when patients receive medical bills they cannot fully pay for. It often comes as a surprise given the complexity and rising costs of healthcare. The good news is recent laws have added credit score protections for medical debt, making it harder for those debts to harm your credit score. Furthermore, there are ways to get medical under control and make a payoff plan:

• Look for billing errors: Make sure your bill does not have errors, such as wrong billing codes or duplicate charges.
• Negotiate with your provider: See if you can negotiate discounts or a payment plan, especially if you can show financial hardship.
• Triple-check your insurance: Review your insurance to make sure they didn’t forget to cover something they’re supposed to.
• Consolidate and refinance: In some cases, consolidating and refinancing medical debt may be possible.
• Seek charitable help: Various charitable organizations may offer guidance on or financial assistance with medical debt for qualifying patients.

4. Tax debt

Tax debt occurs when you have outstanding unpaid taxes at the federal, state, or local level. You’ll receive an official document notifying you of your debt and what you can do. Eliminating tax debt starts with filing and paying your taxes correctly, in full, and on time. If you can’t pay your full taxes owed, file on time anyways to avoid additional penalties.

Fortunately, the IRS offers several official ways to pay down federal income tax debt, such as installment plans or a settlement called an “offer in compromise.” States and localities may differ in how they handle tax debt.

If you disagree with info on your tax bill, you can speak with the IRS about it. If you made an error that caused you to owe taxes, filing an amended return could help you rectify it. Ultimately, working with a tax professional can help you navigate tax debt given the potential complexity and variety.

5. Mortgage debt

Mortgage debt buys a home, using the home as collateral. They’re designed for payoff by a specific date. Mortgages can be fixed or variable. Fixed loans entail fixed, predictable monthly payments. Variable mortgage rates may fluctuate with the broader economy and rates. You can make larger or more frequent payments to pay it off early. However, some may advise against this for a few reasons:

• Prepayment penalties: Lenders may charge a penalty for early payoff to offset interest losses it could cause.
• Opportunity cost: Depending on your goals and distance to retirement, investing those extra funds elsewhere may help you earn higher potential returns than the interest savings of paying off your home early.

People may target their mortgage debt last given the size and low rate. It’s often a priority for retirees or those getting close. If you struggle to make mortgage payments, you may be able to seek out the following:

• Loan modification: Your lender may be open to adjusting loan terms to ensure you can make payments during longer-term hardship.
• Deferment: Your lender may allow you to temporarily pause payments for short-term financial hardship, although you’ll need to supply proof of hardship.
• Refinancing: Refinancing your mortgage could secure a lower rate and monthly payment if you have a strong credit score and good mortgage payment history.

The bottom line

Plenty of people get into debt at some point for many reasons, but debt doesn’t have to stop you from achieving your financial goals. The key is understanding each debt and whether it serves a helpful purpose (such as a mortgage for a home). From there, you can prioritize your debts and create plans to pay down each one of them.

Even if it takes a long time to pay off debts, having a clear roadmap and focusing on the milestones makes it much more manageable and achievable. Keep at it and you will eventually whittle down your debts and create a brighter financial future.

Source:

¹ Education Data Initiative – Average Student Loan Debt