Comparing Do-It-Yourself Debt Reduction Methods
By: Connie Solidad
When you have too much unsecured credit card debt and your bills start to get out of control, you need to make a plan to reduce your credit card debt quickly and efficiently. While paying according to the minimum payment schedules set by your creditors will maintain your credit rating, it doesn’t actually do much in the way of reducing your debt burden quickly. After all, payment schedules are designed to maximize the credit card companies profits through the interest paid on your debt.
With this in mind, you have to make a plan to pay back what you owe faster than the minimum payment schedule designates. Paying off your debt faster reduces the amount of interest you end up paying to your creditors which saves you money over the long-term. In addition, as you reduce the debts, you also reduce the amount of money you have to put towards credit card payments each month. This provides relief for your budget so you don’t have to do a juggling act to keep up with your bill payments.
So you know you need to pay more than the minimum amounts due, but how? As you make a plan to reduce your debt, you generally want to use one of two methods: the debt meltdown technique or the debt roll-up technique. These are more effective than just putting a little more money on all your debt payments simultaneously, because it focuses your efforts on eliminating one credit card debt at a time. You get out of debt faster and save money on interest payments.
In both plans, you need to streamline your budget to free up as much money as possible for reducing your debt. Cut out any discretionary expenses, which are things you buy every month but don’t necessarily need. Also look for ways to reduce flexible expenses, such as gas and food. You may need to start taking your lunch to work, coupon for your grocery shopping, arrange a carpool with other moms for kids’ activities, or commit to eating more dinners at home with the family.
Once you have the money freed up, you can start reducing your debt. Pay the minimum payments on all your obligations, but put any extra money you freed up to paying off one debt at a time. With the debt meltdown technique, you focus your money on the debt with the highest interest rate first. This is the most financially efficient method, because the highest interest rate debt grows the fastest. Eliminating it first saves you money. Once you pay off the highest interest rate debt, focus your extra funds to paying off the debt with the next highest interest rate. Continue until you are debt-free or feel you’ve gotten your debt back to a manageable level.
Of course many consumers struggle with the debt meltdown method, because their highest interest rate debt may also be their largest debt. No matter how much money you try to free up in your budget, paying this debt back could take years and won’t provide the financial relief you need now. In this case, the debt roll-up technique is better because it allows you to build up momentum to tackle your largest debts.
You still pay the minimums on all your obligations, but you focus all of your extra cash flow on the debt with the lowest balance first. Once you pay this smallest debt off, you won’t owe anything each month on that zero balance credit card. All of the money you used to put towards that bill can be rolled into the money you are using to pay your debts off. This gives you more money to tackle your next smallest debt. You build momentum like a snowball rolling down a hill, which is why this method is also called the snowball method.
If you assess your budget and neither method will allow you to pay off your debt quickly on your own, don’t wait to seek help. Contact a certified credit counselor to discuss other options available for debt relief. They will evaluate your debts and financial situation to help determine the best solution to get you out of debt.
More from Financial Bin contributor Connie Solidad: Do Debt Management Plans Work for More than Just Credit Card Debt?
Connie Solidad has been writing about finances and debt consolidation for years. She’s an expert in the industry and writes about management of personal debt, ways to pay off credit card debt and credit counseling options and resources. When Connie is not working, she loves playing with her two dogs in Tampa, Florida. To learn more about debt management refer to ConsolidatedCredit.org.