How to Reduce Personal Debt

Some types of personal debt, such as a home mortgage, are considered constructive, since you can earn a return on the investment you make using the borrowed money. Other types of debt, including credit card debt, tend to damage your financial situation by making you pay back more than you owe due to interest. To reduce personal debt, you have to pay off more debt than you incur. A few simple strategies can help make the process easier.

Instructions

1

Analyze your cash flow situation. While it makes sense to pay off as much debt as you can, if you pay more towards your debt than you earn in income then you perpetuate the debt cycle. By analyzing your cash flow and budgeting for debt repayment, you can avoid getting caught in the situation of paying too much debt off too fast, then having to resort to borrowing yet again to pay your other monthly expenses.

2

Cut out discretionary expenses. Discretionary expenses are those that you want to spend money on, as opposed to required expenses on which you must spend money. For example, your budget most likely has monthly required expenses such as rent, food and utilities. After you pay all the required bills, the money you have left for items such as eating out at restaurants, buying new electronics or going on trips is your discretionary income. The more you can reduce your monthly discretionary spending, the more rapidly you can reduce your personal debt.

3

Negotiate lower interest rates. Particularly if your personal debt is in the form of credit card debt, your annual interest rate could be as high as 15 percent or more. With a rate of 15 percent, you are paying an additional $150 per year in interest for every $1,000 you have in debt. Call your creditor and ask for a lower interest rate. If your creditor does not offer one, shop around to see if you can find another loan or credit card with a lower rate. Every dollar you can avoid in interest charges is a dollar that you can use to reduce your personal debt.

4

Stop incurring more debt. While the interest charges on your debt increase your debt every month, you can overcome this through payments as long as you do not incur further debt. You are only running backwards if you continue to charge while you are trying to reduce your personal debt.