Debt Reduction Vs. Debt

It's easy to find things you would rather spend money on each month than your debt, but if you don't reduce your debt, your interest payments will end up costing you precious money that you could use to meet your financial goals. By choosing a method of debt reduction and sticking with it, you will pay off your debt in a far shorter period of time, freeing your future income for things you really want to invest in.

Debt

If you allow your debt to accumulate or stay stagnant, you're likely doing a disservice to your credit score. The amount of debt that you have in relation to your credit limit is called your debt utilization ratio, and it makes up roughly one-third of your credit score. By failing to take action to reduce your debt, you're keeping yourself from having the best credit score possible, even if you're making minimum payments on time each month.

Debt Reduction

When you reduce your debt, you're taking the necessary steps to boost your credit score and you're also reducing the amount you end up spending overall. For example, Kiplinger writer Kimberly Lankford points out that a $5,000 balance with an 18 percent interest rate has a minimum payment of $200 per month; however, by just paying those minimums, you're going to pay an additional $2,916 in interest alone over the 12 1/2 years it would take to pay off the card. With this example, it's easy to see how reducing your debt means that you're freeing up your money for better use.

Options

Many options exist for reducing your debt, but all paths begin at simple budgeting. After comparing your spending with your income, figure out where you may cut back to contribute more to your debt. Consider utilizing either the debt snowball plan, where you pay off the debt with the smallest balance first, or the highest interest rate plan, where you pay off the debt with the most damaging interest rate first.

Considerations

If your debt situation feels unmanageable, visit a reputable credit counseling service. The National Foundation for Credit Counseling website contains listings of reputable credit counselors. A counselor will help you to create a budget and make recommendations for ways to pay off your debt. Your credit counselor will help you understand how utilizing a debt consolidation loan, debt management plan or settlement will affect your credit both in the short- and long-term future.