The statistics are scary. In 2004, 43 percent of Americans spent more than they earned. The average amount of credit card debt totaled over $8,000. The savings rate was the lowest in decades.
Since then, the housing market has crashed and unemployment hovers near 10 percent. This financial wake-up call has caused consumers to reevaluate their finances, and for many, the top priority is getting out of debt. Luckily, free debt reduction strategies are plentiful.
"Snowball" Your Payments
"Pushing," or "snowballing" your payments is the most popular method to quickly eliminate your debts. Begin by making a list of your debts. Apply as much money as you can toward paying off one debt -- choose either the highest-interest or the lowest-balance debt first. When that debt is paid, apply the payment toward the next highest-interest or lowest-balance debt on your list. The website Vertex 42 offers several free budget calculators and debt management spreadsheets that allow the user to select the strategy that works best.
Reducing Your Interest Rate
Often, simply calling your lenders and asking for better terms results in lowered interest rates. This strategy allows for a greater percentage of your payment to be applied toward your principal balance. Credit card customer service representatives, for example, are often authorized to reduce interest rates over the phone -- and all it takes is a simple phone call.
It's also possible to reduce interest expense on auto and home loans. With rates currently at record lows, it's an excellent time to refinance. The "holy grail" of loan refinancing occurs when a lender simply lowers the interest rate without requiring the owner to apply for a new loan.
If you are successful, keep your payments the same even if the minimum amount required decreases as a result of the new rate.
What's Required
Gather your bills and make a list, including the balance owed, interest rate, minimum payment and contact information. Determine which bill should be paid first. Tackling the highest-interest loan first guarantees you'll pay less over time, but it may not be as satisfying as first paying a smaller bill in full. The debt worksheets at Vertex 42 will help you decide.
Most importantly, you'll need discipline. All debt reduction strategies, free and for-hire, use the same technique: consistent, pushed payments and reduced interest. However, what makes a debt reduction strategy successful is your ability to make a budget, set a goal and stick to it.
Debt Reduction Traps
Home equity and other consolidation loans are tempting and frequently low-cost. However, be honest with yourself and carefully evaluate your spending habits. If you have a habit of paying off one debt only to run up another, then this approach is definitely not for you. When you take out a home equity loan to pay credit card debt, for example, you've used your home as collateral. If you default, you could lose your most precious asset, and the underlying behavior has not been addressed.
However, paying debt down becomes its own reward when you begin to enjoy your new stable financial future.
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