• Reassess: Get a Handle on Your Debt
    Find out how much your debt is costing you.
    Day 1
  • Revamp: Get on a Budget
    Stop contributing to your debt today.
    Day 2
  • Reset: Get a Debt Payment Plan
    Choose the plan that will work for you.
    Day 3
  • Wrap-Up & Review
    Find out your next steps so you can stay on the path to becoming debt-free.
    Wrap Up

Day 1 Reassess: Get a Handle on Your Debt

25 minutes


The first step to becoming debt-free is understanding how debt works.

Assets and Debts in Money CenterDebt is money borrowed from an institution or person with the promise of paying it back at some point, often with interest.

Any debts or loans you owe—whether for credit cards, student loans or something else—are called financial liabilities. If you explored your Money Center dashboard after linking your accounts, you saw these accounts in red, while your assets—savings, investments or businesses, real estate or valuable possessions you own—were colored green.

Debt is never 100% a good thing, but some kinds of debt are worse to have than others.

Good vs. Bad Debt

Ultimately, what differentiates good debt from bad debt is the interest rate. Good debt tends to have a low interest rate, and bad debt tends to have a higher rate.

Good vs. Bad Debt

Good debt may also be tax-deductible (check with your CPA or tax preparer to be sure). Real estate sometimes has the added bonus of increasing in value. However, good debt can easily become bad debt if it is taken on without a solid plan for repaying the loan. As we saw in the housing market crash of the late 2000s, a mortgage is very bad debt when the person holding it can’t afford her payments because of ballooning interest rates.


Debt is important to understand, because most of us deal with it at one point or another.

According to a nationwide survey conducted by LearnVest and Chase Blueprint, 31% of respondents say that credit card debt is keeping them from reaching their financial goals, making it the leading reason. More than half of respondents do not pay their monthly balances in full, and the average credit card debt is $5,000.

Student loan debt is also a significant factor, with about one in four correspondents having such debt and the average balance equalling more than $30,000. However, as we explained above about "good debt," most feel that the money they spent on their educations was worth it.

YOUR TO-DO: Calculate How Much Your Debt Is costing You

There are two kinds of interest: simple and compound. When you have debt, simple interest is generally the better kind of interest to have.

Compound Interest vs. Simple Interest

Simple interest is a percentage multiplied by the amount you borrow and the length of time you promise to pay it back. For example, if you borrow $100 at an interest rate of 1%, and you have to pay it back in one year, the simple interest is $1. So you’ll pay back $101. 

The more complicated kind of interest, compound interest, is the worse kind of interest to have on your debt. (On the other hand, if you have that kind of interest on an investment, then yay for you! With compound interest, it will be easier for you to make money on it.)

When interest is compounded, it is calculated over and over again at set intervals, so it builds upon itself to make interest grow continually (as shown above). Let's say you take out a $10,000 student loan that compounds annually at 5%, and you promise to repay it within three years. If you don’t make any payments, you will owe $10,500 after the first year, and then the second year, you'll pay 5% on the amount you borrowed, plus on the interest that accrued the year before: $11,025. The same will happen the third year, so by then, you'll owe $11,576.25. Over the term of the loan, you’ll be paying almost $1,600 in interest!

One of the reasons credit card debt is considered bad debt is because credit card interest compounds.

1. Estimate the cost of your simple interest.

OK--so you get that compounding interest can quickly snowball. Still, interest on other kinds of debt can also add up. There are actually some types of simple debts whose interest can be reduced if you pay the debt more quickly. At the moment, however, just make an estimate of how much this debt is costing you. For loans such as student loans and car loans, you should be able to find either the percentage you are paying in interest, or the dollar amount you are paying in interest right on your statement.

  1. To calculate how much you will pay on your student loan, use this Bankrate calculator.
  2. To calculate how much you'll pay on an auto loan, try out Bankrate's auto loan calculator.

2. Estimate the cost of your compound interest.

For your credit card debt, find out the following using this calculator:

  1. How much you will pay in interest if you only pay the minimum, or whatever amount you are currently paying monthly.
  2. How much you will pay in interest if you increase your monthly payment. 

3. Tally up how much your debt is costing you.

Once you have your sum, think of what you'd rather do with that money. Finance a dream vacation? Have that much more in savings? Have that much more in your retirement account? Come up with a motivating list, and over the next few days, we'll help you get on track to pay down your debt and eventually put your money toward your dreams.

Your Next Steps

1. Take a deeper dive into understanding how debt works.

2. Negotiate down your APR.

3. Get inspired!

Many other people have endured debt to pay it off. So can you! Learn from their examples.

  • She was making $30,000 a year. But she still paid of $35,000 in debt—with the help of "the money lunch."
  • Her boyfriend asked her how much she owed in debt. She didn't know, so she tallied it up: $90,000. And three years later, it was gone.
  • Tracking every dollar: One of our editors paid off her student loans by logging every dollar she spent
  • Her husband found out she owed $25,000 in credit card debt. With auto-payments to credit cards and a lot of baking, she paid it off in two years.
  • This mom of six kids had a mortgage, auto loan and credit card debt—all of which totaled $89,000. She paid it off within six months by getting really creative.

4. Get motivated!

  • Finally, create a financial vision board. When you're feeling your motivation flagging, just take a quick look at this vision of your future life to remember what you're working toward.
  • And, while you're at it, also take a moment to appreciate what you have now by making a gratitude list.

Day 1

Congrats! Day 1 Is Complete!

Not bad, right? Now that you know how much your debt is costing you, tomorrow we'll turn to keeping your debt from getting any bigger.

Join the Conversation!

  • mlg

    I owe about 35000 in bad debt, how soon can I be free of debt if my income per month is about 1600.00

  • kate

    Hi! We are 40,000 in debt. We are about $1,500 short of the money we need for food, gas, cc bills and utilities. We no longer own a house, and have 3 daughters 9,11 and 3. I don’t know where to begin please help

    • Shylo

      Kate, read my replies to Chris & Jeannie below. there are many ways to reduce your debt obligations each month but you don’t say what they are. Go online and search out what your options are based on each type of debt. Due to the job loses and the economy and having a democratic leadership, many options have opened up to the consumers in the last 6 years. There are even legal options for credit card debt and many options if your debt is from the loss of a home due to foreclosure! In the case of Foreclosure, you may even be financially compensated for that loss. But if you don’t know this, you will be taken advantage of! But remember, this information is always always FREE! If anyone tries to get you to pay a fee for this information, they are always scams! Look on government sites and there are local government housing programs who have now branched out to help those whose homes were stolen through loss of jobs, unfair mortgages, etc……. REMEMBER, NEVER EVER PAY FOR THIS INFORMATION! THERE ARE MANY LEGAL AND ALWAYS FREE PROGRAMS THAT WILL HELP YOU FIND YOUR OPTIONS AND TO NAVIGATE THE LEGAL PROCESS TO ACCESS THESE PROGRAMS. lets just say they are there because instead of putting rich wall street and political officials in jail for the crimes against we the people since the early 1980′s they struck a deal to develop these programs to help the people who were hurt by being legally scammed out of the American Dream! Research and learn and you will be ale to dig yourself out of this mess that was not your fault! There are legal programs also requiring credit card companies to revise what you owe under lets say a more equitable program!

  • Jeannie

    My spouse’s student loan debt is killing us. It’s $75K. He did an MA in architecture… graduated just as the housing bubble peaked. The three jobs he’s had since graduation in 2007 barely lasted 4-6 months each before the outfit folded or lost too much work to keep him on, and none long enough to qualify for unemployment. Worse: he is 62 and a wheelchair user — not many employers even look at him these days.

    Is there any way we can get relief from this Sallie Mae loan?? I don’t want to be paying it off when I’m 75 and he’s in a nursing home!

    • Shylo

      Jeannie: File for an IBR (Income based Repayment) There are other types but if you qualify that is the best one. same thing happened to my daughter, but based on her income and obligations, her payments are $0 each month! Thats right a $0 payment is counted as a payment. Once a year she has to fill out an updated income form to see what her payments will be. It can range from $0 to the actual $ amount but is always based on income and obligations. After 10 years, they will consider her as paid in full! This is for all types of federal student loans including unsubsidized. However this program does not accept private loans, but I heard that if you consolidate your private loans into a federal type loan, there are similar programs you can qualify for! Another option if he qualifies is a disability waiver.

      • Livy

        Can you tell me where I can find more info on consolidating a private loan into a federal type loan? I’ve never heard of this but that would help me out a lot.

  • Chris G

    I am currently on unemployment (laid off from a 65K per year position) and am now living on $1800 per month. I have hospital bills that are now going to collections and my once perfect credit score it taking a nose dive. Once I get a job, what is the best way to do damage control on my unpaid hospital bills that are total ling around $9000?

    • shylo

      Chris, you can go to the hospitals financial aide department who can base your payments on your income verses obligations, often reducing the amount owed or even wiping the account clean. All hospitals must provide this service if they accept federal and/or state dollars, and all of them do!

  • http://www.chicwriter.com/ Shevonne

    Thanks for starting this!