When you find yourself in thousands of dollars’ worth of debt, the most common questions that comes up is simple: how can I reduce my debt? But the challenge can seem rather insurmountable.
You may have come across ads on the TV that promise quick fixes to credit card debt, or debt reduction plans that can help you to pay off your debt in the ‘fastest’ and the ‘best’ ways. However, all you need is a little planning and dedication to reduce your debt on your own. In fact, the best ways to reduce debt are free and quite effective. All you need to know is where to start. There’s no need to spend money on counselors and consolidation agencies to do things you can literally do for yourself.
The following are the tricks of the trade, and one of the fastest ways to get out of debt on your own through a five-step plan.
1. Evaluate your Debts
According to data from the Federal Reserve, Americans have a total outstanding credit card debt of $945.9 billion, also known as revolving debt. Based on this most recent population numbers in the U.S., this means that an average American is in almost $4,000 worth of credit card debt. Before you start reducing your debt, it’s important to know exactly where you stand, since the type and the amount of debt you have will influence the options available to you.
Be sure to collect all your relevant financial information and documents, and print a copy of your free annual credit reports. Use the free tool on credit.com to check for your current credit scores to establish where you stand. This is a really important step on your path towards debt recovery, but one that most people are really scared to take. Write down your balance, monthly amount due, and the interest rates for each of your debts on a piece of paper.
Ensure that you include all of your personal loans, auto loans, credit cards, payday loans, and other debts. Don’t forget to make not of any annual fees charged on your credit cards. But you don’t need to include your student loans or mortgage at this time. These are relatively long-term loans with low APRs, and it’s best to first focus on eliminating other debts first.
2. Check your Monthly Budget
Once you have all the information regarding your debts, take a look at your monthly budget. On a piece of paper, write down your after-tax monthly income and subtract your mortgage/rent payment from this amount, as well as any other expenses like insurance, childcare, utilities, student loan repayments, groceries, etc.
Ensure that all of your expenses are subtracted, and calculate the amount you have left to pay off your debts. If the amount is too small, you must look for ways to reduce your monthly spending. Consider carpooling, or canceling your cable subscription as a way to cut back until you get your finances in order. The more you contribute to paying off your debts every month, the sooner you will be debt free. If you need extra help then try moneyexpert.com for debt management
3. Make a Plan
Since you’re now more attuned to your financial situation, come up with a comprehensive plan on how you’ll reduce your debts. In this step, the information you collected in step one and two will come in handy. Subtract the minimum debt payments as well as your monthly expenses from your total after-tax monthly income. The remainder should then be used to pay off the debt that has the highest balance and the highest interest rates.
Go through this cycle every month until you’ve paid off the debt in full and then go on to the next highest balance/rate account. Although this might seem a bit odd, it’s the fastest way to lower your debts and to limit the amount in interest that you will owe. Ensure that you don’t add any new charges to your credit card during this time. In fact, it may be worth your while to do a little research on the best balance transfer cards to maximize your efforts. Moreover, try to raise the amounts you pay towards the most expensive debt every month and track your progress.
4. Start Negotiations
Once you start following your repayment plan as created in step 3, contact your lenders and creditors to find out if there are ways you can improve the terms on these debts. You can actually lower the interest rates or get a reduced settlement on some of your debts by negotiating with the customer care department. Don’t worry, it’s quite easy to negotiate for favorable terms with debts that are in the collections or ones that are charged off already.
Consider transferring some of your credit card debts to a new account with lower interest rates. If for example, you move the balance to a credit card with a 0% introductory rate for about 6 to 12 months, you can save a lot of money on interest. Just make sure that you keep each of the credit card balances below the 30% credit limit so that you don’t damage your credit score. Also look into whether consolidating your debts into a home equity loan or personal loan can help.
5. Follow Your Debt Reduction Plan
Try your best to keep up with the repayment goals of each month. Don’t sweat it if the amount you pay towards your most expensive loan varies. But try to be as consistent as possible to put the largest possible amount toward clearing off the debt. To stay on track, it’s a good idea to set up an automated payment system and having a chart to monitor your progress. Whenever you reach a major milestone, it won’t hurt to celebrate your success. You will be debt-free before you know it!