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  • Writer's pictureAngie Franzone, MA

Debt Reduction: The Good, the Bad, and the Budget

Debt. The four-letter word that brings with it the feeling of shame, anxiety, and stress. If you’re part of the debt club, don’t let it get you down. The fact of the matter is most people who are reading this right now have debt. The average American debt, which includes all types of debt, is $90,460 with 77% of American households having at least some type of debt (CNBC, 11/21;, 10/21/21). As the below chart illustrates, no matter what your age group, you are not alone in having debt, and believe it or not, some types of debt are good if managed responsibly.

Good vs. Bad Debt.

When I think about good and bad debt, I can’t help but picture good debt sitting on one shoulder with a halo and bad debt on the other with horns. Bad debt is the one that whispers, “Hey, it’s almost the Super Bowl, we need that 90-inch TV, just put it on a credit card and pay it off later.” And good debt says, “No we don’t, we only watch it for the commercials anyway, let’s focus on investing in our future and not in seeing Flamin’ Hot Doritos and Cheetos in high-def.

Examples of good debt are low-interest rate loans that can be used to finance something that will offer a good return on your investment, like a mortgage or a student loan and includes amounts that are 36% or less than your pre-tax income. Bad debt is debt that you are unable to repay, includes amounts over 37% of your pre-tax income, and which doesn’t provide a return for your investment. Examples are credit cards with high-interest rates or high-interest loans like payday loans.

If you have too much debt it can affect your credit score, which is something that lenders use to learn about your creditworthiness, i.e., how likely you are to pay back a loan based on your credit history. Your score is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores, used by 90% of top lenders ( The higher your credit score, the lower the risk to lenders and therefore the lower your interest rates. A bad credit score is not a life sentence. You can improve your credit score over time with patience.

3 Steps to Improve Your Credit Score

According to three steps to improving your credit score are

  1. Check your credit report for errors. You are entitled to one free copy of your credit report every 12 months from each of the three nationwide reporting companies, Equifax, Experian, and TransUnion. You can order these reports on

  2. Pay your bills on time. Payments that are even just a few days late can have a significantly negative impact on your credit score.

  3. Reduce the amount of debt you owe. Keep balances low on credit cards and focus on high-interest cards first while maintaining minimum payments on other accounts.

If you currently have bad debt and feel overwhelmed by it, take a deep breath, and think about what is in your control. Start by using a balance sheet, like the one below to assess your assets and liabilities.

Personal Balance Sheet Fillable
Download PDF • 122KB

Once you determine your net worth, set goals, and make a plan for paying down your debt. Creating a budget to track, identify and prioritize your spending is a great way to begin paying down your debt, starting with high-interest debt. has a budgeting app and has a free budgeting worksheet on their website. The general rule for how you spend your take-home pay is 50/30/20, where 50% of your paycheck goes towards needs like housing, groceries, and healthcare, 30% goes towards wants like dining out, entertainment, and vacations, and 20% goes towards your savings, paying down debt, investing and retirement.

We're Here to Help

If you need assistance reducing your debt and getting it under control you can reach out to an advisor at Spectrum who can help guide you on your journey towards financial wellness. Advisors are available Monday through Friday 8:30 am – 5:00 pm CST or by scheduled appointment by calling 1-800-242-4735 or via email at Always remember, your self-worth is not defined by your net worth. When bad debt starts whispering in your ear, brush your shoulder off and stick to your plan.


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