Reducing Debt

A report by the American Bankers Association in January 2009 found that delinquencies from bank-issued credit cards hit their highest level in five years during the second quarter of 2008. If you are in debt, there is no better time than now to start your plan to reduce your debt.

Calculate Debt

The very first piece of information you need is your debt load. To calculate, add up all your existing debt, including your mortgage, car payment, credit cards and medical bills. Next, add up your monthly payments such as insurance, clothing, food, haircuts, fuel, electricity, entertainment and similar payments. The reason for putting the numbers on paper is that it is easier to comprehend your true financial situation when you can see it in black and white.

Compare your expenses against your income. Any percentage of debt over 36% puts you in a financially unhealthy state.

Take a red pen and start slashing out things you do not need. Such items include dining out, cable, hobbies or other entertainment. Once you have cut down on, or out of, your budget non-necessities look around your home. Do you own items you no longer need? Do you have a pile of CDs or DVDs? Are your bookshelves crammed beyond reason? Are there electronic items you no longer use? Is there jewelry you no longer wear? Try selling these items on eBay, your local Craigslist or Yahoo selling group. There are fees associated with selling on eBay, but it is free to post for-sale items on Craigslist and Yahoo selling groups.

Extra Income

Do you have the time available to take on extra work? Do you have a marketable skill that will allow you to work from home? Is there a local business that could use help a day or two a week?

Once you are making extra income, add that to your budget. The purpose of this step is to ensure any extra money is going toward your bills and not on non-necessities.

Debt Reduction Plan

After you have reviewed expenses and income, it is time to make a plan to reduce debt. Rate your bills by necessity. Mortgages, car payments and insurance are at the top of the list.

Next, put your credit card payments in order of highest interest first. If you have an extra $10, $20 or $50 a month, add it to the payment of the highest interest card. Pay the minimum balance on the rest of the credit cards and/or loans. Once that credit card is paid off, take the entire amount paid per month and add it to the monthly payment of the next credit card and/or loan in line. If you continue this pattern, $10,000 worth of credit card debt can be paid off in two to three years compared with 30 years of paying only the minimum balance.