3 Ways to Reduce Your Debt

Does your debt feel like it’s spiraling out of control? Even if it’s just starting to feel a little overwhelming, now is the time to take action. These strategies can help you regain financial control — and peace of mind.


Set the Stage

Start your quest with a simple step: Write down what you owe — balances, interest rates and monthly payments for every account, plus a grand total. Don’t panic at the numbers you see. Use them to fuel your momentum on your journey to becoming debt-free.


Pick Your Method

  • Option 1: Eliminate high-interest debt first. This is a common choice that many experts advocate. After all, over the long-term, you’ll pay much more in interest fees on a credit card at, say, 15 percent than an auto loan at 4 percent.
  • Option 2: Eliminate the smallest debts first. Give yourself a quick “win” — and a big morale boost — by starting with a minor debt that you can pay off fast. Then move on to the next smallest debt and so on.
  • Option 3: Consolidate. With this approach, you combine multiple debts into one account with a lower interest rate. This lets you focus your resources into a single monthly payment rather than splitting it up. You may also save on interest fees over the long term. If you own a home, you may be able to consolidate using a home equity loan or line of credit, which may also offer some tax benefits (talk with your tax advisor for details).


The Snowball Approach

If you choose option 1 or 2, then you can incorporate the “snowball approach.” Here’s how it works:

  • Make at least minimum monthly payments on all your accounts, but for your target debt (highest interest or smallest balance), add as much extra as possible.
  • Once that account is paid off, identify the next one in line.
  • Create a payment snowball: Combine the money you were paying on the first debt with the amount you’ve been paying on the second debt. You’ll have a larger payment and pay off the balance sooner.
  • Repeat with each successive balance.


Find the Funds You Need

Any debt-reduction strategy relies on your ability to make more than the minimum monthly payment on at least one account. But if you’re already feeling stretched, where do you find those extra funds? Start with a critical look at your monthly expenses. For instance, switching from cable TV to internet streaming could potentially save you close to $100 every month or $1,200 per year. Likewise, you may be able to reduce your mobile phone bill, eat out less frequently or cancel subscriptions and memberships you don’t use.


Bid Big Debt Goodbye Forever

Once all your balances reach zero, give yourself a major pat on the back — and then eliminate temptation. Narrow down your active credit cards to one or two with the lowest interest rates and cut up the rest. Don't close the accounts — it's actually good for your credit score to keep them open to establish a longer credit history. Do try to pay off your active balances every month or at least keep your total monthly debt payments to 10 percent of your monthly net pay. Then enjoy peace of mind knowing you have debt where it belongs — under control.