3 Step Guide for Debt Reduction

Credit cards have allowed us to spend beyond our means, which can quickly lead to piles of debt. With large balances and sky-high interest rates, you may be headed towards a crisis and need an effective debt reduction plan soon. Otherwise you may just continue to make the minimum monthly payments and make very little progress in reducing your balances. To help you make some headway, here are some credit card debt reduction strategies:

Photo by SqueakyMarmot.

Track your Budget

Buy yourself a small notebook that you can carry around with you all the time, and use it to keep track of all your expenditures for one month. Or you can even track your budget on your phone with a mobile app, such as Mint’s iPhone app. Be sure to include everything from your daily designer coffee to the snack you buy on the way out of the gym. Categorize your spending so that at the end of the month you have an idea of where all your money is going. Once you know that, you can decide where you can make some cuts that you can live with. How much are you spending eating meals out? Do you still need both the landline and your cell phone? Could you live without cable service for a year and then get in on a good introductory offer? See just how much money you might be able to free up and use toward reducing your debt faster.
Use Other Funds for Debt Reduction

Here’s where you may be able to surprise yourself. If you have money in a savings account earning a low interest rate, it can make good financial sense to use those funds to pay off high-interest accounts. Just make sure you aren’t tapping into your emergency fund or your 401k. You can also use any money you may get from bonuses at work or your income tax refund, rather than using them for other purchases you may have been planning. Decide if you really need that new LCD television, or if you can wait until next year when the prices are probably going to be even lower? And then you can use the money you saved on interest charges to help pay for it at the lower price. Of course, if you’ve already limited your spending as much as you can tolerate, then maybe getting a second job for a while will help give you some breathing room.
Debt Reduction Done Right

When deciding how to allocate your payments on your credit card accounts, make just the minimum payments on all your cards except for your highest interest rate account. Use all the money that’s left over to pay that account down. After it is fully paid off, then go after the next highest interest rate account, and so on. When you do pay off an account don’t close it, as doing this may actually lower your credit score. It also makes sense for you to call each of your creditors and ask them if they can lower your interest rate. Some of them may do this just because you asked, and you have nothing to lose.

Other Debt Reduction Solutions

Perhaps you’re already behind on some of your accounts and the fees and penalties are racking up fast. If the debt reduction strategies recommended above aren’t providing enough relief, then it may be time to explore more powerful debt solutions. Since bankruptcy and debt settlement should be reserved for severe situations, you should first explore alternative debt reduction options. Educate yourself about both debt management (also known as consumer credit counseling) programs and speak with a debt advisor. They can give you a free consultation over the phone and even work the numbers for you to see if it all makes sense.