Reducing Your Debt The Smart Way

This article explains a systematic way to reduce your debt and to quit charging while you are doing this. It is important to priortirize your bills and then to quit charging permanently.

If you have decided to reduce your debt, take a moment to congratulate yourself. Sadly, many individuals today have taken advantage of no interest or low interest for a specified period of time, only to find excessively high interest rates kick in if they are late in a payment, or after an introductory period ends.

Similarly, too many homeowners have given in to the temptation to treat their homes like an ATM, withdrawing cash against a home equity line of credit to pay for transient luxuries like travel and vacations. It is time for this nation to stop going in to debt and start looking for ways to reduce debt.

Take Stock of Your Situation

As silly as it sounds, many adults are afraid to add up all their debt and face the amount they owe. But you must do this if you are going to reduce your debt. Get out all your credit card bills and a notebook or electronic spreadsheet, and start adding them up.

For each debt, make a note of the balance and the interest rate. Be sure to include any sums you have borrowed from friends and family members as you plunged yourself into debt. Don't bother noting the minimum monthly payment; you're never going to pay that again.

Next, find the debt with the lowest balance. If the balance is under $500, pay that debt off right away. Even if it is not the debt with the highest interest rate, paying one creditor off completely, down to a zero balance, will give you a valuable sense of accomplishment and confidence you will need as you reduce your debt even further.

Prioritize

Identify which of your remaining debts has the highest interest rate. Those are the debts that you must pay off first. You must dedicate yourself to reducing you debt. Every little windfall – every tax refund and holiday bonus – must go toward debt reduction. Similarly, the debts that have a low interest rate can be paid off last. Debts like low-rate home mortgages and student loans fall into this category.

Stop Charging

It seems obvious, but it is so important that it is worth saying, and repeating: stop going into debt. While you are concentrating on debt reduction, do not continue to incur new debt. Don’t take cash advances on your home equity line of credit. Don't take cash advances on your credit cards. Don't charge consumer merchandise on your department store cards. Don't use a gas card to pay for gas.

Don't fall into the trap of thinking you are coming out ahead by using a credit card for airline miles or other rewards. The reward is rarely worth the high interest you will pay for the credit card balance.

Paying off your bills is important but it is, also, important to pay them off in the correct order. By doing this you will save hundreds of  dollars in interest by paying off the higher interest rates first. In turn you will be out of debt sooner by following the correct order of things.