How do you start to get your debt under control?

Most people have two major financial goals: get out of debt and have a savings. For many, debt is the bigger priority because they can’t even begin to start a savings account until they have some debt paid down.

Three good ways to view your individual debts

There are several different ways of looking at your debts:

  • Secured versus unsecured debt
  • Good debt versus bad debt
  • High-priority debt versus low-priority debt

No matter which lens you choose to use when viewing your debts, it’s important to understand why you are assigning certain debts to those categories. That’s the first step toward getting control of the debt.

Understand secured debt and unsecured debt

Secured debt is debt that is connected to an asset of yours — like a house loan. If you fail to pay your house loan long enough, the lender will foreclose and sell your house for the best price it can get. You’re then responsible for the difference between what the lender got from the sale and what you actually owed.

Unsecured debt is debt that was given to you on good faith — like most credit cards. If you default on those, the lender may try to harass you into paying or even sue you to get a judgment and garnish your income, but there are no assets to take.

Recognize good debt and bad debt

For the most part, “good” and “bad” debt often fall into the same categories — unless you happen to be living in a house you can’t afford or one that has deeply devalued since you bought it.

Similarly, a car loan is generally thought of as “good” debt — it’s a responsible purchase. However, if the payment is over your head or you’re deeply “upside down” on the loan (to the point that it will never be worth what you are paying for it), it may be a very bad debt indeed.

Manage high-priority debts and low-priority debts

Your high-priority debts are your essentials: shelter, utilities, transportation and food. Your credit cards, while nice to have, are a low-priority if things get tight.

Once you understand what type of debt you have, it’s often wise to talk to someone with a deeper understanding of debt management — to help you develop debt relief strategies for the future.