Debt reduction illustration. (Photo: Andrey_Popov/Shutterstock)

How to Reduce Your Debt Without Getting Overwhelmed

By Joni Sweet

Whether it’s from credit card debts, medical expenses or student loans, debt is an overwhelming experience. Making the minimum payments gets the creditors off your back for now, but you know you’ll have another bill waiting for you next month. How can you pay this off, once and for all?

Here are some debt reduction tips that can help you dig your way out of the negative.

Look at all your debts

When you’re focused on keeping the creditors at bay, it can be a struggle to see the big picture of your debt. Take stock of the situation by gathering all your bills and putting the information in one place.

“Look at all your credit card accounts and other debts, how much you owe, what the minimum payments are and the interest rates. Write it all down on a piece of paper or Excel chart,” said Andrea Woroch, a nationally recognized money-saving expert.

Then, crunch the numbers on your income and expenses to figure out just how much you can afford to put toward debt each month. That will form of the basis of your debt reduction plan.

“When it comes to debt reduction, it’s about what you can do, not what you should do. Be realistic about how much you can actually pay each month — you can’t rush it,” said Woroch.

Snowball vs. avalanche methods

Two of the most popular ways to reduce debt are known as snowball and avalanche. With both methods, you’ll make minimum payments on all your debts while devoting any extra dollars toward a single debt. So which is better?

It depends on how you’re motivated, said Woroch.

“With avalanche, you’ll focus on the debt with the highest interest rate first and work your way back to the lowest one as you pay them off. It will help you save the most money over time, but it can feel like it takes awhile,” she explained.

With the snowball method, you’ll reduce debt by paying off the account with the lowest balance first and working your way up to bigger balances.

“This one helps create better habits and motivation. It’s like catching small winds that push you toward your goals, and every time you pay off one balance, you’ll feel encouraged to hit your next goal,” said Woroch.

Do you need quick wins to feel successful? The snowball method might be right for you. But if you like the idea of saving more money on interest, you might want to give avalanche a try.

Consider consolidating your debt

When you’ve got a lot of monthly bills coming in, it can be tough to keep everything straight. Consolidation can make credit card debt reduction easier by lumping everything into one monthly payment.

“If you have credit card debt across multiple cards, it might be a good idea to consolidate them with a personal loan from your bank or credit union,” said Woroch. “That can make it easier to manage and the loan will typically have a lower interest rate than your credit cards.”

Another credit card debt reduction trick involves opening up a new card with a 0 percent introductory interest rate, then transferring your other debts to that account.

“This typically allows you to pay no interest for 12-18 months. Just be sure to pay off your balance in full by the end of the introductory period, or you could be slammed with retroactive interest,” said Woroch.

Ask about debt resolutions

You’ve probably heard of ways to wipe out your balance with a phone call, but how does debt relief work?

Generally, what happens is that you hire a debt settlement company to negotiate with lenders on your behalf. The agreement might involve paying a big chunk of your debt right away, then closing your accounts. However, your credit score may take a hit and you’ll owe fees to the debt settlers, so it’s not a great option.

“You actually don’t need to rely on debt settlement services,” said Woroch. “Try and do it on your own. Call your providers and talk to them about your financial situation to see if you can negotiate a debt resolution.”

Build an emergency fund

As you work on your debt reduction plan, be sure to budget for a monthly deposit to your savings account. Building an emergency fund gives you the financial security to deal with surprise expenses that could otherwise put you in more debt.

“Debt doesn’t just happen to people who made a bad purchase — it also happens to budget-savvy people who don’t have enough money to cover an emergency, like a sick pet or major car repair,” said Woroch. “You need a cash cushion to cover life’s unexpected moments without using a high-interest credit card or borrowing money from family and friends.”

A solid emergency fund generally has enough to pay three month’s worth of living expenses. That might seem like a lot to save when you’re trying to reduce debt, but stashing away just a little bit every month can put you on better financial footing, said Woroch.

Debt doesn’t have to be a crushing experience. Taking control of what you owe and setting up a debt reduction plan can empower you to get rid of those balances for good.

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