How to pay off debt

Debt makes any purchases you make cost more in the long run and limits your ability to do other things in the future. Not all debt is bad, but reducing the debt you have can give you more options both now and later.

Be in close contact with any creditors. Many lenders have payment programs available in case of disability, loss of income or other reasons. They can often work with you to alter your repayment, interest rates or other terms that offer some flexibility. But they may require you to close any open ended credit accounts, such as credit cards or other lines of credit.

You can also compare household income versus expenses to identify potential ways to increase income or cut expenses. Missing payments can damage your credit and compound the problem with late fees.

We recommend you make at least the minimum payment on all debts first. Then when deciding which debts to pay extra on, focus on either the highest interest rate or lowest remaining balance debt. Keep in mind any promotional rates that will expire, as a much higher rate may be in effect after the promotional period ends. The type of debt, such as a mortgage or student loan, can also be a factor when deciding which debt to pay extra on. Other considerations such as tax implications or loan forgiveness may be in play.

There are several components to your credit score. The score attempts to measure a person's ability to borrow and repay to creditors. Generally, holding higher balances of debt can negatively impact your credit score. Not paying debts or missing payments will lower your score as well. Paying debt balances down, making payments on time and holding credit accounts for long periods of time can have a positive effect on your score.

Yes. Part of your credit score includes the average length of credit history. So, keeping accounts open that you've had for a long time can be useful in maintaining length of credit history. But if you know you'll be tempted to charge up debts again, you may be better off closing the accounts.

Debt consolidation typically involves taking out a new loan and using those proceeds to pay off existing debts. This could be a good strategy if you're looking to consolidate the number of payments you need to manage each month, potentially lower your overall interest rate and are able to pay off the debt faster as a result.

The answer depends on the details. There are a few things you'll want to consider when deciding whether to proceed with a debt consolidation loan:

• What are the fees, terms and interest rate for the consolidation loan versus existing debt?
• Will the consolidation loan help you pay off debt faster or does it stretch the payments over a longer period, which could cost you more in interest in the long run?
• Are your credit score and other factors sufficient for you to qualify for the new consolidation loan?
• Have you considered other options, such as a balance transfer? You'll need to check if there is a balance transfer limit and that you qualify. You'll also want to consider fees, terms and interest rates.

Depending on the answers to these questions, it may or may not make sense to pay off the debt with a consolidation loan. If it will save you money, help you pay off the debt faster and you're able to qualify for the loan, then it could be a good option. If not, set a time frame goal and put together a plan that will allow you pay off your debt within that period.

It's possible to save money by consolidating debts. You may be able to obtain a loan at a lower rate than your existing debts. The key is to ensure you pay off the existing debts with the consolidation loan proceeds and avoid accumulating the debt again. You'll also want to consider the terms and conditions of the consolidation loan, fees, prepayment penalties and any other associated cost. Be sure the loan doesn't cost you more in the long run. This can happen if you take out a loan to lower your overall monthly payments, but do so by stretching the loan over a longer period. In the end, even with a lower rate, you could still end up paying more.

Positive payment history typically remains on a credit report for 10 years from the last date of activity. Negative payment history typically remains for seven years from the last date of activity but can remain for up to 10 years in certain situations. Closing the account won't eliminate it from your credit history immediately.

Bottom line: Unpaid debt will reflect negatively on your credit. The accounts will likely end up in collections, and depending on the creditor, you could face legal action and even wage garnishment.

You most likely won't go to jail for not paying most debts like credit cards, loans or hospital bills. But you can be sued by creditors and get a judgment against you. For more information on protections from debt collectors, see the Federal Trade Commission's consumer information on debt collection.^{See note1}

Stick with companies you know and trust, read the fine print and know that if it sounds too good to be true, it likely is.

There are different types of bankruptcy, with different impacts. If you're considering bankruptcy, it's best to seek the advice of a bankruptcy attorney and engage in pre-bankruptcy counseling with a certified credit counselor. They can discuss your specific situation, the impact filing will have on your debt and your credit, and any alternative action you may want to consider.

While each person may have contributed differently to the debt load, it's important to focus on the future and actions you both can take to help. Work with your partner to outline the positive reasons you want to paydown debt. Both of you should have input into and agree on actions for your debt pay-down plan. Teamwork will do more to promote your long-term success than a plan on paper alone.

Debt settlement is where a creditor agrees to accept less money than the full amount owed from the borrower. The borrower benefits from paying a lower balance, and the creditor gets paid something rather than having to write off the balance of the debt. If you settle debts, be sure to keep and document payoff amounts, and be aware that the IRS may count part of the debt settled as taxable income. Your credit report reflects any settled debts. For more information, you can look at the IRS Publication 4681 on canceled debts.^{See note1}

Here are some key differences between credit counseling services and debt settlement companies, as explained by the Consumer Financial Protection Bureau.^{See note1}

Credit counseling services are usually nonprofit organizations that:

• Advise you on managing your money and debts.
• Help you budget your payments.
• Reach agreed-upon payment plans with your creditors. These plans usually don't have tax implications.
• May be able to help lower your overall monthly payment and negotiate an interest rate reduction — not a reduction in the amount you owe — on individual creditor accounts.
• Collect a monthly payment, which is distributed to each of your creditors.

Debt settlement companies are usually for-profit companies that can't charge you until after they perform services, which include:

• Offering to arrange settlements of your debts with creditors or debt collectors. Note: Some creditors won't negotiate. Companies often have no up-front agreements with creditors.
• Paying off your debts with a lump sum payment that you save up in an independent account that you control.
• Usually advising that you stop paying your creditors until a debt settlement is negotiated with creditors, which may damage your credit and result in a lawsuit.

Note: Debt settlement may involve debt forgiveness, which may have tax implications.