Debt Reduction - Do it yourself
With a little commitment it is possible to reduce your debts independently. It is not always necessary to discuss your situation with a debt counselor or enroll in some type of debt consolidation program if you follow a few general guidelines for debt reduction.
Step 1: Evaluate your financial situation
Collect all of your bills, pay stubs and any other financial paperwork you have along with a recent copy of your credit report. It is a good idea to check your records against your credit report to make sure that you aren't trying to repay any debts that aren't necessary or that have exceeded the applicable statute of limitations. Attempting to do so will revive these debts! This is the first step and often the most difficult. You need to not only pay attention to the balances owed, but also the interest rate, due date, annual fees and other characteristics of the debt that could affect your financial situation.
Step 2: Budget Review.
After you have recorded all of your debts, take a look at your monthly expenditures and evaluate your budget. A good place to start is determining your "Take Home" Pay (Net Income after your taxes and withholdings). After you determine your Take Home Pay, you should subtract the fixed expenses that will remain the same each month and necessities for living (i.e. mortgage/rent, auto expenses, childcare, student loans, insurance, utilities, groceries, etc). After you have calculated all of this, what is left should be used for repayment of debt and other discretionary spending items. If you are unable to support the debt, your next step would be to determine a way to reduce your monthly living expenses. Questions you should ask yourself are, can I opt for the lower telephone plan, or lower my monthly cable bill? Sometimes we begin to confuse necessary expenses with luxury expenses. The more money you can dedicate each month to paying off your debt, the sooner you will be living debt-free. When making the minimum payments, the overwhelming majority of the money paid is used exclusively to cover the interest rates you are paying. This is the way that your banks/creditors profit and you will find yourself on a "Debt Treadmill" so to speak, with no way to ever get off. Your debt can often take many years to repay. Please see the minimum payment calculator on our home page to calculate the length of time it will take to pay off your debt if only making minimum payments. By making payments in excess of your minimum payments, you can actually start to pay down the principle owed.
Step 3: Course of Action
Now that you have a more thorough understanding of your own financial situation, you should devise a plan for reducing your debt. If you subtract the minimum payments calculated in step 1 above and the monthly expenses calculated in step 2 above from your "Take Home" pay, you will have all remaining discretionary money available to you. Discretionary money describes the money that is available to your for all leisure items that aren't necessary for living. Your goal should be to apply as much of the discretionary money you have available towards paying off your debt. You should start with the highest interest rate cards/debts and work your way down. This will be the quickest way to pay off your debts. It is a good idea to avoid using your credit so that you don't add to the problem and find yourself back to square one.
Step 4: Negotiate with your creditors
In these difficult economic times, many of your creditors will be sympathetic to your plight. If you have a legitimate hardship, they may be understanding of your situation and can potentially work with you. It is a good idea to pick up the phone, explain your situation, and simply ask the creditors if they can do anything to improve the terms of your agreement with them. Some potential assistance they might offer would be to lower your interest rates or even negotiate a reduced balance on some of your debts. You will have greater success negotiating the terms on debt that is already delinquent, or charged off (dismissed by your creditor and sold/turned over to collections). If you are receiving offers of credit, you should consider transferring balances to new credit cards with a 0% introductory rate for 6-12 months or just simply a lower rate. If the majority of your payment is being applied to principal because your interest is so low, you will find yourself reducing your debts much faster. Make sure to pay attention to the percentage of your debt relative to your limit. Card balances above 35% of the limit can further damage your credit score.
Step 5: Dedication
A plan is only as good as the commitment you make to keeping it. Getting out of debt requires discipline and persistence. You did not get into debt overnight and you will not get out of debt overnight. You must be patient with the process and meet your payment goals each and every month. If you follow these steps, you could put yourself in a position of financial security and stability.