Updated: Jul 14
The subject of debt is often a scary one – most people think of debt in the terms of what they owe to a particular bank or financial institution.
For many people, the global pandemic of 2020 pushed them into – or further in – debt than the previous year.
Currently, the average American has over $90K in debt, which includes a variety of consumer debt products like:
The average household now carries an average debt of $145K, a sharp increase from the $50K in 2000.
If you find yourself in debt, the good news is you can easily get out of debt with just a few steps, starting with the difference between good debt and bad debt.
Good Debt vs Bad Debt
So what’s the difference between good debt and bad debt?
Good debt is usually a loan that has the potential to increase your net worth. These include:
Business credit cards at 0%
Bad debt is where you’re borrowing money to purchase depreciating assets. These include:
Credit card debt
Basically, anything where you’re not making money off something is considered bad debt. Ultimately, regardless of the distinction, you still want to pay off any debt as much as you’re able.
Let’s talk about doing exactly that.
Debt Consolidation Considerations
First and foremost, when you start paying off debt, you should always note the interest rates on the loans or cards that have the debt.
Always pay down the item that has the highest interest rate first before paying the ones with lower interest.
There are a few different strategies to use to help avoid interest:
Balance transfers are a great way of transferring money from one card to another.
In this case, a balance transfer can be used to transfer a high-interest card’s balance to one with a lower one.
For example, if you have a card with 30% interest and a card that only has, say 10% at the same bank, you should transfer the balance of the higher interest card to the lowest one.
Doing this helps to neutralize utilization. Utilization is the ratio of your total credit to your total debt.
Basically, the more you spend across all of your credit cards, that’s your utilization and usually represented as a percent.
Let’s say you have two credit cards – one with a limit of $1000 and another with $2000 dollars.
If you’ve come close to the total balance of both cards (say, you spent $950 on the first and $1900 on the second), this would be considered using 90-100% utilization.
The higher your utilization, the more your credit suffers as it contributes to your overall credit score. By transferring the higher interest to a lower card, your utilization starts to decrease.
Moving limits is similar to a balance transfer, however instead of transferring the balance of a card, you’d be moving your card limits.
This works especially well if you have cards from Chase, where you can move your credit balance limit from one card to another.
Liquidation Pay Back
This strategy works by asking people you know to help pay down your balance.
This of course is dependent on the relationship with the person you’re asking and how comfortable they are with lending out money to you.
For this method, you would use the money to pay off your personal cards; this then results in your utilization being 0%, which helps to increase your FICO score when it updates.
If your personal credit is strong enough, try to apply for business credit. Once approved, you can pull out the money to pay back your family or friend lender, then pay back the balance on the card.
Lastly, there’s repairing your credit. Even if you have a low credit score and collections harassing you, there is still hope.
The Fair Credit Reporting Act was passed in the late 1970s and states that a credit lender or bureau must remove a collection if it can’t prove a collection.
A lot of people aren’t aware of their rights under the FCRA or that they can dispute a collection on their credit file, so it’s important you know what rights you have.
Take advantage of the system, don’t let it take advantage of you!
If you want to learn more about gaining access to business credit and how to repair your personal credit, come join the Credit Stacking community.