Personal debt becomes a financial drain with high interest rates and monthly payments that destroy a person’s cash flow. Reducing one’s debt becomes much more difficult when there is no money left over (after paying bills) for today’s purchases. People turn to credit cards when the cash runs out, which only continues the vicious cycle.
Stop Using Credit Cards
Easier said than done, but it is vital that a person who wishes to get out of debt cease going into debt. Taking credit cards out of one’s wallet so they cannot be used for impulse purchases is a necessary debt reduction strategy.
Debt Reduction Strategy: Get to Know the Debt
Compile all debts on a table. That means all credit cards, bills for loans, mortgages, student loans, etc. Assess on paper how much is owed and how much interest is being paid (APR) on each debt. The Get to Know Your Debt worksheet is a helpful organizing tool in the form of a free PDF download at Fool.com.
Debt Reduction Strategy: Lower Interest Rates
The lower the interest on any debt, the faster it can be paid off. Call debtors and ask them to lower the APR. Ask politely, and if the person on the phone is unable to help, ask to speak to a supervisor or manager. Make clear that the employee has done nothing wrong, but that it is necessary to speak to somebody in a position of authority.
It is worth taking the time to keep ‘going up the ladder’. The company may continue to refuse, but it is still worth asking.
Debt Reduction Strategy: Consolidate Unsecured Debts
Consolidate credit card debt as much as possible. Get the bulk of all debts consolidated into the loan with the lowest interest rate. When consolidating debts, make sure to ask the company to waive the transfer fees. Also, when consolidating credit cards ascertain that the interest rate for transferred balances is not higher than the regular interest rate.
Income to Debt Ratio
Add up all debt payments for one month, and compare this to monthly take-home pay (take-home pay is after taxes).
- If the debt payments are the higher number, there is trouble. Speak to a financial adviser, take a second job, or consider bankruptcy.
- If the numbers are close, there is still trouble, and the above suggestions apply.
- If take-home pay is higher than total debt payments, then the difference is disposable income that can be put toward further reducing debt.
Budget and Payment Plan
Some payments are fixed, such as rent or mortgage. Once debt is consolidated and the banks have been negotiated with, the monthly payments are fixed. Some monthly expenses are flexible. For example, everybody needs groceries, but some people buy generic which lowers their monthly grocery bill.
To reduce personal financial debt, a person must
- stick to a monthly payment plan,
- not go further into debt (ie, not use credit cards), and
- budget his or her discretionary income to last the month.
The third is much easier said than done, but with patience and determination the debt will reduce over time, which will eventually free up more income.