What Is Debt and How to Handle It - NerdWallet (2024)

At its simplest, debt is defined as money owed by one party to another. But it can get complicated fast. Depending on your circ*mstances, debt can be a useful financial tool or baggage complicating your life.

The best way to handle your debt depends on what kind of debt you have and how much you owe. If you have too much debt, you may need to find debt relief. Just be wary of any company that over-promises or sounds too good to be true, such as debt forgiveness.

Below we break down the various forms of debt and how to handle them.

Secured vs. unsecured debt

There are two types of debt: secured and unsecured.

Secured debt means the borrower has pledged an asset as collateral for the loan. Auto loans and mortgages are common examples of secured debt. If you fail to repay as agreed, the creditor can seize the asset, for instance repossessing a car or foreclosing on a house.

Unsecured debt, on the other hand, is not backed by an asset. A common example is credit card debt. However, that doesn’t mean you get off scot-free if you fail to repay.

A credit card issuer, for instance, will likely sell your delinquent debt to a third-party debt collector, which may then hound you for payment. If you don’t pay the debt collector, it may sue you for payment, which can lead to wage garnishment. Some really aggressive original creditors may sue you directly, without using a collection agency.

Credit card debt

Credit card debt is among the most common — and most expensive — form of unsecured debt.

Americans' total credit card debt reached an estimated $416 billion in 2020, according to NerdWallet’s annual American household credit card debt study. Among people with revolving credit card debt, the average amount owed was $7,027.

Depending on your personal credit score, the annual percentage rates, or APRs, on your credit cards can be in the teens and 20s. Not paying off your full balance each month can get expensive, fast.

If you’re having trouble paying off your credit card debt, here are a few ways to handle it:

  • Consider a debt management plan from a nonprofit credit counseling agency.

  • If you have multiple debts, see if you can consolidate them.

  • Look into a 0% intro APR balance transfer credit card.

  • Talk with a bankruptcy attorney to explore your options.

Medical bill debt

Medical bill debt can come from a routine visit to your doctor, or from an unexpected event like a broken bone or hospitalization. This type of debt can be expensive and, further complicating matters, there's not a clear-cut way to handle it if you can’t afford to pay it off all at once.

Here are a few ways to pay off your medical bills:

  • Set up a payment plan.

  • Use a medical credit card.

  • Hire a medical bill advocate.

No matter how strapped you are for cash to pay your medical bills, avoid putting the medical bill on a credit card. Most medical providers don’t charge interest; moving that debt to a credit card wipes out that advantage and can make it more expensive.

Student loans

If you graduated from college in the past few years with student loan debt, chances are you’re carrying a sizable balance. On average, U.S. households that had student debt in 2020 carried a balance of $56,572.

Student loans are either federal or private, with a variety of loan types between the two. Regardless of where the debt came from, you’ll likely be paying your student loans off for years to come.

You have a few ways to get help with student loan debt:

  • Call your student loan servicer to discuss relief options.

  • Sign up for an income-driven repayment plan.

  • Apply for forgiveness, if you qualify.

Be wary of any companies that promise full debt relief help — many are scams.

Personal loans

Personal loans can help consolidate credit card debt or provide cash flow for a specific reason, like a home remodel. Loan terms are generally two to five years, with interest rates that range from 5% to 36%.

If you’re having trouble paying back your personal loan:

  • Call the lender to see if you can defer payments or go on a hardship plan.

  • Consult the free help of a nonprofit credit counselor to better manage your budget.

  • Talk with a bankruptcy attorney if you’re facing too much debt.

Car loans

Car loans are a form of secured debt, meaning that if you don’t pay, the lender can take back the car that serves as collateral. Car loans are growing longer and more expensive. This can make them harder to pay off, especially if your budget is tight.

Here’s how to handle an expensive car loan:

  • Refinance the loan.

  • Downsize your car for a less expensive one.

  • Find a way out of the loan.


Getting a mortgage is likely the biggest personal finance decision you’ll make. They generally last decades and cost hundreds of thousands of dollars. In 2020, the average American carried a mortgage balance of $190,595, according to NerdWallet’s debt study. A mortgage is a secured loan, meaning the bank can take your house if you don’t pay as agreed.

But you have some recourse if you’re having trouble paying your mortgage:

  • Consider refinancing your mortgage.

  • Take advantage of the Home Affordable Refinance Program.

Business debt

Debt is often a necessary part of keeping a small business running. You can take out a loan or business line of credit to hire more employees or purchase new equipment.

But too much debt can put a crimp in your business cash flow and potentially put your business at risk.

If you’re facing steep debt, there are several ways you can get your business out of debt. They include:

  • Boosting your sales.

  • Refinancing or consolidating your high-interest business debt.

Collections accounts

It's common to have an account in collections. About 28% of consumers with credit files do, according to a 2020 report from the Consumer Financial Protection Bureau.

Knowing how to handle a debt in collections can be tricky, though. Here are some steps to follow if you’re being hounded by debt collectors:

  • Brush up on your debt collection rights.

  • Don’t give in to pressure to make a quick payment.

  • Gather information on the debt.

  • Make a plan to handle the debt in collections — options include creating a payment plan, settling the debt or paying it in full.

» MORE: Understanding what debt is in Canada and the types of debt

As an expert in personal finance and debt management, I can provide valuable insights into the concepts discussed in the article. I have a deep understanding of various forms of debt and strategies to handle them effectively.

The article begins by defining debt as money owed by one party to another and highlights its complexity based on individual circ*mstances. It emphasizes that debt can be both a useful financial tool and a potential burden, depending on how it is managed. I'll break down the key concepts mentioned in the article:

  1. Secured vs. Unsecured Debt:

    • Secured debt involves pledging an asset as collateral for the loan, such as auto loans and mortgages.
    • Unsecured debt is not backed by an asset, with credit card debt being a common example.
  2. Credit Card Debt:

    • It's highlighted as one of the most common and expensive forms of unsecured debt.
    • The article mentions the average credit card debt in the U.S. and suggests ways to handle it, including debt management plans, consolidation, and balance transfer credit cards.
  3. Medical Bill Debt:

    • Discusses the challenges of handling medical bills, suggesting options like payment plans, medical credit cards, and hiring a medical bill advocate.
    • Emphasizes avoiding putting medical bills on credit cards to maintain the advantage of not incurring interest.
  4. Student Loans:

    • Addresses the prevalence of student loan debt and provides strategies for managing it, such as contacting loan servicers, exploring income-driven repayment plans, and applying for forgiveness.
    • Warns against scams related to companies promising full debt relief.
  5. Personal Loans:

    • Highlights the role of personal loans in consolidating debt or addressing specific financial needs.
    • Provides advice on dealing with personal loan challenges, including deferring payments, seeking help from credit counselors, and consulting with bankruptcy attorneys.
  6. Car Loans:

    • Describes car loans as a form of secured debt with potential collateral consequences.
    • Offers solutions for handling expensive car loans, such as refinancing, downsizing, or finding a way out.
  7. Mortgage:

    • Acknowledges mortgages as a significant financial decision, emphasizing their long-term and substantial nature.
    • Suggests options for managing mortgage difficulties, including refinancing and utilizing programs like the Home Affordable Refinance Program.
  8. Business Debt:

    • Discusses the role of debt in small businesses, emphasizing the need for balance and caution.
    • Provides strategies for managing business debt, such as boosting sales and refinancing.
  9. Collections Accounts:

    • Recognizes the common occurrence of accounts in collections.
    • Advises on how to handle debt in collections, including understanding rights, resisting pressure, gathering information, and creating a plan.

Understanding these concepts is crucial for making informed decisions about managing various types of debt effectively. If you have specific questions or need further guidance on any of these topics, feel free to ask.

What Is Debt and How to Handle It - NerdWallet (2024)


How do you handle debt? ›

7 steps to more effectively manage and reduce your debt
  1. Take account of your accounts. ...
  2. Check your credit report. ...
  3. Look for opportunities to consolidate. ...
  4. Be honest about your spending. ...
  5. Determine how much you have to pay. ...
  6. Figure out how much extra you can budget. ...
  7. Determine your debt-reduction strategy.

How long will it take to pay off $30,000 in debt? ›

It will take 41 months to pay off $30,000 with payments of $1,000 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.

Is $6,000 a lot of credit card debt? ›

If you're saddled with credit card debt, you're not alone — the average American household has more than $6,000 in revolving credit card balances. But with a good payoff plan, you can be debt-free sooner than you think without hurting your credit.

How do I get rid of $30 K in credit card debt? ›

How to Get Rid of $30k in Credit Card Debt
  1. Make a list of all your credit card debts.
  2. Make a budget.
  3. Create a strategy to pay down debt.
  4. Pay more than your minimum payment whenever possible.
  5. Set goals and timeline for repayment.
  6. Consolidate your debt.
  7. Implement a debt management plan.
Aug 4, 2023

What is debt in simple words? ›

What Is Debt? Debt is something, usually money, owed by one party to another. Debt is used by many individuals and companies to make large purchases that they could not afford under other circ*mstances. Unless a debt is forgiven by the lender, it must be paid back, typically with added interest.

What is the 20 30 rule? ›

Key Takeaways. The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).

Is $5000 in debt a lot? ›

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.

How to pay off $9,000 in debt fast? ›

7 ways to pay off debt fast
  1. Pay more than the minimum payment every month. ...
  2. Tackle high-interest debts with the avalanche method. ...
  3. Set up a payment plan. ...
  4. Put extra money toward paying off your debts. ...
  5. Start a side hustle. ...
  6. Limit unnecessary spending. ...
  7. Don't let your debt hit collections.
May 9, 2023

How can I get out of $20000 debt fast? ›

If you have $20,000 in credit card debt that you need to pay off in three years or less, you have multiple options to consider, including:
  1. Take advantage of a debt relief service.
  2. Consolidate your debt with a home equity loan.
  3. Take advantage of 0% balance transfer credit cards.
Feb 15, 2024

How many Americans are debt free? ›

Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more. The exact definition of debt free can vary, though, depending on whom you ask.

What is the average American debt? ›

The average debt an American owes is $104,215 across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans. Data from Experian breaks down the average debt a consumer holds based on type, age, credit score, and state.

How many people have $50,000 in credit card debt? ›

Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year.

Is the National Debt Relief Program legit? ›

National Debt Relief is a legitimate company providing debt relief services. The company was founded in 2009 and is a member of the American Association for Debt Resolution (AADR). It's certified by the International Association of Professional Debt Arbitrators (IAPDA), and is accredited by the BBB.

How can I pay off my credit card debt if I have no money? ›

How to pay off credit card debt
  1. Try the avalanche method.
  2. Test the snowball method.
  3. Consider a balance transfer card.
  4. Get your spending under control.
  5. Grow your emergency fund.
  6. Switch to cash.
  7. Explore debt consolidation loans.
Mar 20, 2024

How can I get out of debt with no money and bad credit? ›

How to get out of debt when you have no money
  1. Step 1: Stop taking on new debt. ...
  2. Step 2: Determine how much you owe. ...
  3. Step 3: Create a budget. ...
  4. Step 4: Pay off the smallest debts first. ...
  5. Step 5: Start tackling larger debts. ...
  6. Step 6: Look for ways to earn extra money. ...
  7. Step 7: Boost your credit scores.
Dec 5, 2023

What are the 3 biggest strategies for paying down debt? ›

What's the best way to pay off debt?
  • The snowball method. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt. ...
  • Debt avalanche. Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. ...
  • Debt consolidation.
Aug 8, 2023

How do you pay off debt when you are broke? ›

How to get out of debt when you have no money
  1. Step 1: Stop taking on new debt. ...
  2. Step 2: Determine how much you owe. ...
  3. Step 3: Create a budget. ...
  4. Step 4: Pay off the smallest debts first. ...
  5. Step 5: Start tackling larger debts. ...
  6. Step 6: Look for ways to earn extra money. ...
  7. Step 7: Boost your credit scores.
Dec 5, 2023

How to pay off $10,000 credit card debt? ›

7 ways to pay off $10,000 in credit card debt
  1. Opt for debt relief. One powerful approach to managing and reducing your credit card debt is with the help of debt relief companies. ...
  2. Use the snowball or avalanche method. ...
  3. Find ways to increase your income. ...
  4. Cut unnecessary expenses. ...
  5. Seek credit counseling. ...
  6. Use financial windfalls.
Feb 15, 2024

How do I get out of debt fast? ›

These strategies can help you pay off your debt fast and avoid feeling overwhelmed.
  1. Review and revise your budget. ...
  2. Make more than the minimum payment each month. ...
  3. Target one debt at a time. ...
  4. Consolidate credit card debt. ...
  5. Contact your credit card provider.

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