Many people made a New Year’s resolution to reduce their debt in 2013. Often, consumers become overwhelmed with the idea of lowering their debts and seek the assistance of a professional. However, with some dedication and planning, individuals can set up a debt reduction plan on their own and without the need to pay debt counselors or debt consolidation agency fees.
You will need to complete some preliminary work so that you can put together a reasonable plan. Here are some of the best strategies to help you reduce your debt in 2013:
Get a copy of your credit report
Obtain a copy of your credit report to the Federal Credit Reporting Act requires the major credit reporting agencies to provide you one free credit report each year. When your report arrives, complete the following tasks:
• Verify the accounts and personal information
• Review payment history and balances
• Identify errors in the report
Correct mistakes and inaccuracies by writing to the credit bureaus
List and prioritize debts
For your debt reduction plan, make a list of accounts, balances, interest rates, and monthly payments due for each creditor. This includes credit cards, gas cards, department store cards, personal loans, and other obligations. Make sure you note annual fees charged for credit cards.
Prioritize these accounts—from the highest balance/ interest rate to the lowest balance/interest rate. Feel free to use other factors to compile the list, such as accounts that cause you to lose sleep or other criteria.
Do not include mortgage/rent payment, student loan or car payments. These items go under the category of “minimum monthly debts.”
Review your monthly budget
After you gather the necessary information about your debts, review your monthly budget. Write down your monthly income remaining after taxes. Subtract the monthly mortgage/rent payment from this amount, car note, and student loan payment.
Next, subtract your monthly expenses, such as insurance, utilities, food, and child care.
Then, calculate how much you have remaining to pay off your debts. If your debts exceed this amount, you have to look for ways to curtail spending. For example, you can switch from a premium cable subscription to standard cable or consider car pooling to work.
The goal is to pay as much as you can afford toward your outstanding debts each month and gradually reduce your debt.
Create debt repayment plan
At this point, you should have all the information you need about your financial situation the next step is to put together a debt reduction plan. The money you have remaining after subtracting your minimum debt payments and monthly expenses from your monthly income after taxes will now be used to pay off debt that carries the highest interest in the highest balance.
For example, if you have a monthly after-tax income of $3,000 and the combine minimum debt payments plus monthly expenses equal $2,200, you have $800 remaining to pay down your debts in the following way:
- Use the remaining $800 to make the minimum payment on each account, except the account at the top of your list.
- Apply the rest of the money to the highest balance and highest interest rate account.
- Continue this pattern each month. When you pay off the highest balance/interest rate account—focus on the next account on the list.
During this period, do not add any new charges. Look at other ways to raise money or cut spending to pay down your debt.
Negotiate better terms
After you have your debt reduction program underway, contact the customer service department of each lender/creditor and try to negotiate better terms on your debt. Ask for a lower interest rate on your balance or bargain for a reduced settlement on the debt. If you have debts in collections or charged off, you stand a better chance of negotiating the terms.