Reduce Debt, Increase Your Worth

A Plan to Reduce Debt

While some people get into debt for emotional reasons, others simply lack knowledge and skills surrounding finances. The first practical step in reducing debt is to stop accumulating it. While many experts no longer advise closing accounts because it negatively affects credit scores, it’s important to remove credit cards from your immediate possession or, better yet, cut them up.

If you’re in debt, you may not have a handle on where your money goes. Simply writing down every cent you spend for the first 30 days can enlighten you and lead to better spending habits. Hunt recommends using cold hard cash for 24 to 36 months, rather than a debit card. “Turning over a $100 bill at Wal-Mart is really hard, but swiping a debit card for $99.43 doesn’t seem like anything,” she says.

Getting organized and developing a budget is crucial as you endeavor to reduce debt. Make sure it’s a plan you can live with in the long term, and that you don’t completely deprive yourself of the things you enjoy. If budgeted expenses exceed your income, cut your expenses. Conversely, selling things, getting a second job or examining tax withholding can increase income to help with expenses.

When taking steps to reduce debt, whether it’s loans or credit cards that have you maxed out, the plan you create doesn’t have to be fancy. Shari Potter* of Washington D.C. used a notebook to track her expenses and develop a budget. At 29, Shari quit her full-time job to attend graduate school and lived off her student loans and credit cards. Upon graduation, she found herself with $110,000 in student loans and more than $20,000 in credit-card debt.

Shari had no knowledge of financial planning but developed a logical game plan. “If my salary was $3,000 [per month], I paid almost all of it to bills and continued to live on peanut butter,” she says. Shari got a bare-bones phone plan and did without as much as she could. She paid off her smallest bills first, because it gives the quickest emotional rewards. As she continued to pay off her credit cards over the next two years, Shari also worked to have old items removed from her credit report. “My credit score began skyrocketing,” she says. “It was miraculous to watch.”

As you plan to reduce debt, examine what the biggest problem is before developing a strategy. “If you’re nearly maxed out on certain cards, reduce those balances first,” suggests Khalfani-Cox. Exorbitant interest rates aren’t the thing ailing most consumers, she says. It’s the 30% of their credit score that’s based on the amount of their available credit they’ve used up. “If you’re paying default interest rates, you should pay off those cards first. But if your problem is being maxed out, pay those first,” she adds.