How to Reduce your Debt in 5 Easy Steps

How to Reduce your Debt in 5 Easy Steps



If you have incurred substantial personal debt, consider these

options: budgeting, debt consolidation, credit counselling from a

reputable organization and working with your creditors. You will

need to choose a debt reduction method that will work best for you?

The method you use will depend on your level of debt, how much spare

money you have, your level of discipline, and how quickly you want

to get out of debt.



1. REALISTIC BUDGETING



The first step towards taking control of your financial situation is

to do a realistic assessment of your income and expenditure. Work

out how much you earn (your total income) and write this figure

down. Then total your expenses. This is how much you spend each

month for rent, fuel, food, clothing, heating, water, electricity

and other bills. The difference between your total income and your

total expenses is the amount of money available to pay your

creditors or lenders.



Decide if there are any monthly expenses that you can reduce or live

without. Focus on lowering your expenses so that you can increase

your income. You'll be amazed at how many things you can do without.



a) Debt Reduction Methods



Choose a debt reduction method that fits your situation and gives

the maximum benefit. You could choose to focus on repaying debts

that are most important to your credit rating or to maintaining your

family's safety. Or you can start by paying off those debts with the

highest interest rate thus reducing the total spent on interest

charges and increasing the amount available to pay off debt.



Alternatively, you could focus on paying off bills with the lowest

balances. Then the money used for those payments can go to pay off

other debts.



If your credit payments (excluding mortgages) exceed 15-20% of your

take home pay, you can work with creditors to set up monthly

instalments that are more in line with your income.



b) Credit Cards



Transfer your credit card debts (balance) to a card offering an

introductory 0% interest rate for balance transfers. Make sure you

keep up the repayments and then just before your 0% introductory

offer is up, apply for another 0% card, transfer the balance over

before you starting paying interest – and repeat. With a good credit record, you could do this for years, moving your debt from

one card to another until it's paid off.



3. DEBT CONSOLIDATION



This is when you use a new loan to pay off multiple debts. Your

monthly payment will be lower because repayment is spread out over a

longer period of time. This will usually eliminate the hassle of

having multiple creditors, multiple bills, and multiple payments to

make. It's very important not to take out any additional loans until

your consolidation loan has been repaid. Borrowing against your home

is a cheap way to raise money, but it's risky. If you can't make the payments - or if your payments are late - you could lose

your home.



However, you could replace expensive debts with a cheaper personal

loan (unsecured loan). Before taking on new debts, you might want to

check out your credit history.



4. CREDIT COUNSELING



Some people are not disciplined enough to create a workable budget

and stick to it. If you can't work out a repayment plan with your

creditors and you can't keep track of mounting bills, consider

contacting a credit counselling organization or a financial advisor.

In the UK you can use free debt counselling services such as the

Consumer Credit Counselling, the National Debtline and the Citizens

Advice Bureau. Similar services are available in the US.



5. CONTACTING YOUR CREDITORS



A creditor is a company or person to whom you owe money. Many people

struggling financially ignore debts and fear contacting their

creditors. This reaction will damage your credit record. Creditors

or lenders may take action against you in an effort to get payment.

If you're finding it hard to get your bills paid, be the one to

contact creditors. They will be more willing to work with you. Work

out arrangements that satisfy you both. Explain to each lender that

you aim to repay each debt in full over time, but that they must

accept reduced repayments for now. Decide how much you can pay them

each month and set up a debt repayment plan.



Conclusion

If you're serious about reducing your debt you should stop spending on your credit cards and stop taking out new loans. To

increase your income, consider finding a second job or a lodger.

Claim every state benefit that you qualify for and work on cutting

down your expenses. Sell stuff that you don't need on eBay or at Car Boot fairs. Put enough money aside for emergencies, but use the

bulk of your savings to pay off debt. Debts usually cost you far

more in interest than you gain on your savings. Also, if you have a

fairly good credit record, you should transfer your debts to cheaper

lenders. Finally, shop around for better deals for services and

products that you use.



Disclaimer: This article does not constitute financial advice. If

you require such advice, you should seek appropriate professional

guidance.



Copyright © 2005. Chileshe Mwape writes for Debt Consolidation Loans UK: http://www.best-debt-consolidation-loan.co.uk/. Visit our

site to consolidate debts and apply for a loan online. This article

may be reprinted as long as all the above links are active and

clickable.