Why Reduce Debt

Consumers take on debt to fund purchases ranging from large-ticket items such as homes, cars and education to every-day purchases such as food and clothes. Borrowing to pay for purchases is convenient and might be necessary in the case of large items, but carrying high levels of debt can be detrimental to your finances. Finding ways to reduce debt can be beneficial in many ways.

Debt is Costly

Perhaps the most important benefit of reducing debt is that it lowers the long-term financial burden that debt presents. When you borrow money, you have to pay interest on the amount borrowed. For every dollar of interest you pay, you have one less dollar to save or invest to increase your wealth for the future. It is especially important to pay off high interest debt such as credit card debt as quickly as possible.

Debt and Your Credit Score

Your credit score -- a number based on your credit history -- gives lenders the ability to judge whether to give you a loan and how much interest to charge. The better your credit score, the less costly debt will be in the future. According to MyFico, 30 percent of your credit score is based on your current amount of debt: the more debt you have, the lower your credit score will be. By reducing your current debts, new loans and credit you get in the future might be less costly.

Avoiding Default

Another reason to reduce debts is to avoid the possibility of missing a debt payment, also known as default. If you default on a debt payment, it will likely hurt your credit score. According to MyFico, 35 percent of a credit score is based on your debt payment history. Consumers that get swamped by debt may have few options apart from filing for bankruptcy. Bankruptcy will discharge certain debts, but it has a severe negative effect on credit scores for many years.

Considerations

Strict budgeting, debt refinancing and contracting creditors directly and asking for lower rates are common ways to reduce debt. According to the U.S. Federal Trade Commission's website, consumers can also seek help from credit counselors to create a plan to manage debt or use debt settlement services to negotiate with lenders to reduce debt. The FTC cautions debtors that debt settlement can be risky because they might involve costly fees and can have a long-lasting negative effect on your credit score.