What Is Debt?

Time To Read 2 MIN READ

Debt refers to money that you owe someone else and includes things like credit card debt, student loans, car loans and mortgages. Though few people enjoy talking about it, debt levels in America are high: According to an article published in Time magazine, consumer debt in the United States exceeded $11.5 trillion in 2014.

Repayment Terms

When you borrow money, the lender generally sets the terms of when you have to repay it and how much you must pay back. For example, when you go to the bank for a $10,000 car loan, the bank may say you have to make monthly payments over five years and pay a 7 percent interest rate. The interest rate means you pay back more than you borrowed.

"Good Debt" Versus "Bad Debt"

Not all debt is bad -- there's such a thing as "good debt." Good debt refers to loans you take out for things that will typically increase in value or be tax deductible, such as a home mortgage. Bad debt refers to loans that aren't used to build value and won't save you money on your taxes, such as carrying a balance on your credit card or a car loan (because cars go down in value).

Making a Plan

Whether you call it a budget, spending plan or something else, if you want to lower your debts, you need to lay out a path. To get started, divide your expenses into two categories: fixed costs, which remain the same every month like your mortgage or rent, car payments or insurance costs; and variable costs, such as food, clothing and entertainment. Putting your spending into personal finance software, such as Quicken, can help you identify where your money is going and in which categories you can cut your expenses.

Prioritizing Debts to Pay Off

If you want your payments to have the biggest effect possible, pay the minimum on most debts you owe and direct any extra money in your budget to the debt with the highest interest rate. Alternatively, if you want the emotional boost of being able to cross off debtors from your list quickly, you can choose to pay off your debts by size -- from smallest to largest. And remember that even the best-laid financial plans to get out of debt may need to change from time to time. It's wise to reevaluate your plan every few months and make adjustments as needed.