How to reduce your debt
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Getting out of debt is possible when you know what you owe
and what you can do to repay it. If you’re ready to begin
paying down your debt, start with these three steps.
Step one: Understand debt reduction strategies
There are two basic strategies that can help you reduce debt: the highest interest rate method and the snowball method.
Highest interest rate method
This approach focuses on your debts like credit card
and student loan debts with the highest rate of
interest. The goal is to pay off the highest
interest rate debt as quickly as possible, because
it’s costing you the most. While it may not feel
like you’re making progress, this method will help
you eliminate your costliest debts first—which can
save you money in the long run.
Snowball method
This approach focuses on your smallest debt. The goal is to get rid it as soon as possible. You keep on making the minimum payments on all of your debts, and you put any extra funds you have toward paying off the smallest debt. This will help you pay it off sooner.
Once you’ve paid one smaller debt in full, dedicate that freed up money to the next smallest debt. This way, you create a “snowball” of payments as you eliminate each debt. Unlike the higher interest rate method, you’ll see progress quickly as you pay off smaller debts. However, you may end up paying more in the long run, as you won’t be focusing on the larger or more costly debts.
Step two: Create your debt reduction plan
Download our debt reduction worksheet
to put together a strategy that’s right for you. To use
the worksheet, you’ll need copies of your bills and
interest payment information. If you’re motivated by
saving the most money while still paying off your debts,
the highest interest rate method might be the right choice
for you. However, if you’re motivated by seeing progress
quickly, then you may want to consider the snowball
method. Choose the strategy that’s best for your situation
and put it into action.
Step three: Organize your monthly bills
Understanding what you owe, and when, will help you manage
your debt. You can use a
bill calendar
to keep all your information in one place as you tackle
your debt. Use the bill calendar to see all your bills and
plan when they’re due. Keeping track of your monthly
expenses can help put you one step closer to reaching your
goals.
Take control of your finances
The "Get a Handle on Debt" series gives you tools to manage your debt by budgeting smarter, paying your bills on time, tracking your spending, paying down existing debts, and earning extra income. You can also get money management strategies sent directly to your inbox by signing up for our "Get a Handle on Debt" boot camp.
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