Whether you have a couple of low-interest student loans or a significant burden of debt, creating a debt reduction plan does more than whittle away at the money you owe. You also gain control over your finances, educating yourself about where your money goes every month. A debt reduction plan can help you establish improved financial habits for the rest of your life, such as saving for short-term and long-term financial goals like going on vacation, contributing to an emergency fund or buying a house.
Educate yourself about your debt. Do not rely on estimates and memory when analyzing your financial situation. Look at the cold, hard facts, such as the principle, interest and penalties you pay on a monthly basis to your creditors.
Create a household budget covering all income and out-going funds. To reduce debt, you need to get a solid handle on how much money you have left after deducting all household expenses. Remember to account for irregular income as well as irregular expenses, amortizing them in your monthly budget.
Assess the level of your problem. If you have enough money in your budget to pay more than the minimum on your various lines of credit, first pay the debt with the most onerous terms, typically a high interest rate.
Weigh the possibilities of debt consolidation. You can handle some forms of consolidation yourself, such as applying for a new credit card that allows you to do a balance transfer at a 0 percent introductory interest rate set for a defined period of time. Avoid using this card for any new charges, and aggressively pay off the transferred balance before your introductory period expires.
Consider credit counseling with a reputable, accredited counselor. Many people feel overwhelmed tackling debt because they have budgeting or spending problems. A credit counselor can help you adopt new financial habits.
Items you will need
- Paycheck stubs
- Bank statements
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