How to Lower Debt

By Danita Fausek

  • Overview

    Whether it takes the form of a home mortgage or a balance on a credit card, debt is a fact of life for most of us. And in today's economically challenged society, it has become vitally important to any household to lower its level of debt. This is by no means an easy process; depending on the level of debt, it can take years. However, it is still possible to put yourself and your loved ones on a path to a debt-free life.
    Lowering your debt takes determination.
    • Step 1

      Either on a piece of paper or on your computer, make a list of your finances. This list should include separate columns for paychecks and any incoming dollars. In a separate section, list all monthly bills, including estimates for groceries, miscellaneous food, gas and entertainment. Also include in this "outgoing" section any mortgages, loans or credit-card debt you may have, making sure to include the total amount you owe, as well as the interest rates you are paying. List the amount you actually pay per month from the minimum payment due. It's important to be brutally honest with yourself and your family about your expenditures. You can't lower your debt if you don't understand how the money comes in and goes out of your bank account.
      Financial spreadsheet
    • Step 2

      Collect the credit cards. This is an important step, as it prevents you from accruing any additional debt. You don't have to cut them up; it's a good idea to have them in case of an emergency. Just lock them away somewhere so that you need a really good reason to pull them out.


    • Step 3

      Review your monthly expenses. The purpose of this exercise is to get your monthly bills as low as possible, so the excess money can be put toward paying down your debt. Eliminate duplication of services. For example, note in the accompanying graphic that this family has both cell-phone service and a land line. Eliminating the house phone and switching all phone activity to the cell will effectively eliminate one monthly $60 bill, netting $720 per year. Evaluating the line charges on the cell-phone bill to eliminate excess charges or unused minutes or services will also add to the savings by lowering this monthly bill. Take a hard look at the cable bill as well. Consider how many stations are actually watched. Do you really need 250 channels when your family only watches 10? Call the cable company and negotiate a lower rate. If your Internet connection is combined with your cable, look for a lower-cost package that will give you the channels you want and the computer access you need. Add this monthly savings to the money you use to pay down your debt.
      Review monthly expenses.
    • Step 4

      Review your food and various other expenses. Are you paying $50 per week for that special coffee? That equals $2,600 you are spending per year for something you can make at home. Do you purchase lunch every day? Spending $6 per day on food while you are at work or school means there is an additional $312 per person per year flying out your door. Make lunch from the groceries you purchase each week. This may be tough, but is necessary if you want to eliminate your debt. For example, an egg sandwich at most fast-food restaurants can run about $3, but one can be made at home for approximately 35 cents, creating a savings of $2.65.
    • Step 5

      Manage your credit debt by reviewing how much you owe and how the payments are being made. Starting with the card with the highest interest rate, call and speak to the finance department. Let them know you are working on consolidating/lowering your debt, and that you would like a lower interest rate for the balance of the debt on that card. It helps if you have a number of "unsolicited credit-card offers" handy, as well as an idea of how much you are looking for. Don't start with a 0-percent offer; most often, they will turn you down flat. However, if you state that you'd like something around 4 percent for the entire current balance, it will often be considered. Also, give the company a time limit on how long you'd like the rate to be that low. If you give them a 1- to 2-year time frame, most companies will be happy to consider it. If the company says no, use that information for the next call. Ask the next company for a low rate, for a slightly longer period of time, and offer to transfer the balance from the first card. This will give them a bigger market share, as well as a larger amount to base their charges on. Let them know you are consolidating your debt, and have been happy being one of their customers. A little praise can go along way to getting what you want.
      Review interest rates.
    • Step 6

      Review the minimum payments vs. the payments you are making. How much of the payment actually goes toward paying down the principal amount? If it appears that the majority of your payment is simply paying the interest on your loan, you will never get out of debt. Call the companies and find out how to specifically apply payments to the main amount you owe. The lower the principal is, the less interest you will be paying, and the faster your debt will disappear.
    • Skill: Moderate
    • Tip: Add an emergency fund to your outgoing income. This means that you will "pay" yourself the same amount each month. This money will be put away in case of an emergency. If possible, you want to have at least 3 months' worth of payments in this fund before you touch any of it.
    • Tip: Contact your utility companies. Often, they have fixed-rate payment plans that will allow you to budget more strictly. Instead of having you pay $200 one month and $50 the next, your monthly bill would be an average of the total billed in the past year. For example, if the total amount you were billed for power in one year was $990, your averaged monthly bill would now be $82.50.
    • Tip: Contact your power company for ways to lower your heating and electric bill. There are many money-saving light bulbs and appliances that can help you lower your costs.

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