Whether it’s from a credit card, mortgage, or student loan, most Americans have some amount of debt. But debt doesn’t have to be stressful—if you understand how debt works and have a plan to pay it off.
Here are a few steps to manage your debt responsibly.
Understand your debt
One thing that might surprise you is that not all debt is bad — taking out certain types of loans for certain purchases may actually help to bolster your credit and act as an investment opportunity. Either type of debt must be managed responsibly.
Certain investments, such as buying a home or getting an education may require you to take out a loan in order to afford the cost. These investments are generally considered to be “good debt” because they have the potential to increase your net worth or to appreciate, meaning they will rise in price or value over a period of time.
“Bad debt” refers to loans that are taken out to fund something that depreciates or diminishes in price or value over a period of time. The most common example of bad debt is credit card debt, which tends to carry a high interest rate and may be problematic if the holder keeps a running balance.
How much is too much debt? Determining your debt-to-income ratio is one strategy used by financial institutions to assess whether you have too much debt. A 43% debt-to-income, or DTI ratio is the highest you can have in most cases and still get a qualified mortgage.
|
If your DTI ratio is |
It is considered |
|
Less than 10% |
Optimal |
|
10% - 15% |
Safe |
|
15% - 20% |
Questionable |
|
20% - 30% |
Poor |
|
More than 30% |
At risk |
Choose a payoff option that works for you
There are two strategies that are commonly used to pay off debt — the Avalanche Method and the Snowball Method. Both are designed to pay back debt as quickly as possible.
Using the Avalanche Method, you’ll make a higher payment on the debt with the highest interest rate first while paying the minimum on the rest of your debts. The Snowball Method does the opposite; you’ll pay more on the debt with the lowest balance first while paying the minimum on the rest of your debts.
Ask for help
If you’re struggling to keep up with or get out from under your debt, you may benefit from credit counseling. A nonprofit credit counseling agency can set up a debt management plan to cut your interest rate and put you on a repayment plan.
Next steps to manage your debt
Get an 'at-a-glance' look at your entire financial picture with First Interstate's Money Management tool. Connect your checking, savings, and investment accounts as well as your loans, lines of credit, and credit cards and easily manage your money and set financial goals. Simply sign in to Personal Online Banking and click on Manage Money.