Did you know that the average credit card debt in America is over $16,000? This can be overwhelming for some but with a little dedication and prior planning, it is possible to reduce your debts on your own, with a plan.
Here are 5 simple steps you can take to reduce your debt.
Step 1: Evaluate Your Debts
Collect all of your financial documents and print out your free credit report at annualcreditreport.com. This is an important step toward debt recovery. On a piece of paper write down:
• The balances of each item.
• The interest rate for those items.
• The monthly amount due, or minimum payment, for each item.
Be sure to include your auto loans, personal loans, payday loans, credit cards, and other debts in this list. You don’t need to include your mortgage loan or student loans at this time. These loans have relatively long terms and low interest rates so it is better to focus on paying off your other debts first.
Step 2: Look at Your Budget
After you have collected the information about your debts, you should take a look at your monthly budget. Write down your monthly income after taxes and subtract your rent/mortgage payment from this amount and other monthly expenses such as childcare, student loan payments, insurance, utilities, and groceries. Once you have subtracted all of your expenses, calculate how much you have left to pay off your debts. If this amount is too small, look for ways to reduce your spending. Consider turning off your cable subscription or temporarily suspending your gym membership. The more you can pay towards your debts each month, the sooner you will be debt free.
Step 3: Make a Plan
Now that you know all about your financial situation, it’s time to create a plan for reducing your debts. The amount you have left to pay towards your debt each month should be used to pay off the debt with the highest interest rate first. Pay only the minimum amount required on all of your debt, with the exception of the one debt you are trying to pay off. Continue this cycle each month until the debt is paid off and then move on to the next highest rate account. Use the money you applied to paid off the debt and put it towards the next debt you plan to pay. This may seem like an odd process, but it is the fastest way to reduce your debts. During this time, you should not add any new charges to your credit cards. Also, try to increase the amount you pay toward the debt each month. Use unexpected money you may receive to help pay off the main debt you’re trying to pay down.
Step 4: Start Negotiations
While you are starting to follow your repayment plan from Step 3, you should contact your creditors and lenders to see if you can improve the terms on your debts. You may be able to lower your interest rates or negotiate a reduced settlement on some debts. Also think about moving some of your credit card debts to new accounts with lower interest rates. Moving a balance to a credit card with a 0% introductory rate for 6-12 months can help you save a lot on interest. Just be sure to keep each of your credit card balances below 35% of the credit limits to avoid damaging your credit score. And, keep the card open, especially if you have had it for a while. The length of open lines of credit helps increase your credit score. Also investigate if consolidating your debts into a personal loan or home equity loan could help.
Step 5: Follow-Through Your Debt Reduction Plan
Do your best to meet your repayment goals each month. It’s okay if the amount you put toward your most expensive debt each month varies. Just try to consistently put as much as possible toward your debts. Signing up for an automated payment system and keeping a chart of your progress on the refrigerator can help you stay on track. And, be sure to reward yourself when you reach milestones, just make sure to do it within reason. The only way to be debt free is to keep at it and stay motivated! Before you know it, you’ll be debt free!