Paying down debt may reduce the rates you could pay on future loans and save you a lot in interest payments
Making a long-term effort to pay down debt can eventually allow you to live more debt-free. With just a simple debt management plan, you can live debt-free.
Get the facts.
Collect all your account, loan and credit information. Order your credit reports from all three credit reporting companies and get credit scores to get a baseline for tracking your improvements. Next, write down your total monthly income and list your estimated monthly expenses that don’t appear in your credit reports (such as expenses you pay for with cash).
Do the math.
Calculate how much you usually spend paying each debt and how much interest that debt collects per month. Define which debts need to be paid down first. If you have available cash after paying all your monthly minimums, it usually makes sense for most people to pay down credit card debt and any other high-interest rate loans before paying off low-rate student loans and home loans. Ask yourself:
- Do you have any debts with high interest rates?
- Are there accounts above 35% of their credit limit?
- Do you have any debts that are close to being paid off?
- Do you have any debts with high annual fees?
Debt negotiation and debt consolidation.
Start working on those high-interest debts first. Call your creditors and negotiate lower interest rates or move your balances to less expensive credit cards. Accounts that are above 35% of the available line of credit can harm your credit score; pay off or move some of the balance to a different card. If you have a credit card debt that is too large to handle, your debt reduction plan might include a personal loan from your bank for the amount. Your bank may be able to give you a lower rate and a longer repayment schedule. Debt negotiation and consolidation can be a very effective way to help you live more debt-free.
After taking control of your credit card and small debts, take a look at your major loans. Would it make sense to refinance your mortgage? Investigate debt consolidation programs? What about refinancing your auto loan?
Your debt reduction plan.
Now that you have lowered your rates and refinanced your loans, create a payment schedule and a monthly budget. See exactly how much you can afford to pay each month by subtracting your expenses from your monthly income. Divide the remaining amount between the accounts, paying the most to the debts with the shortest terms and highest interest rates. Create a payment calendar with the due dates and the payment amounts you just calculated for each bill. Sign up for automatic bill payment through your bank or register for online payments. To stay on track, register for credit monitoring online and you’ll receive quarterly credit reports, credit alert emails and trending charts that outline how much your credit improves over time. Set goals for yourself and don’t forget to celebrate when you reach debt-removal milestones, and soon you will be able to live more debt-free.