Debt is a fact of life for many people, and while debt isn’t necessarily a bad thing, bad credit card and debt habits are. When you are burdened with substantial debt, you probably wonder how you can effectively reduce that debt. Here are a few things that can help you get things under control.
You need to stop borrowing. Does that sound obvious? It is, but unfortunately that can be easier said than done. The fact of the matter is that you will never climb out of debt if you continue to borrow money. Resist the temptation to use your credit cards and remove them from your wallet or purse. Put them in a lock box at the bank, or freeze them in a block of ice. Do whatever it takes to make them harder to get to.
Consolidate Your Debt
Many credit cards have very high interest rates, and these high rates make your monthly payment larger. Not only does it increase the monthly payment, but you will spend hundreds or thousands of dollars in interest while repaying the debt. If you can, you want to negotiate a lower interest rate or consolidate the higher interest debts into a more favorable rate. Editor’s Note: Using Prosper to get a loan is an excellent way to consolidate debt – use the Loan Calculator to view a summary of your loan’s overall cost.
Break the Minimum Payment Habit
Once you have stopped borrowing more money and have obtained reasonable interest rates on your debt, you need to break the minimum payment habit. Did you know that on a typical credit card, if you only make the minimum payment, it can take over ten years to pay it off? In addition, over that time period you will likely pay more in interest than the original balance was.
The minimum payment may be affordable, but you are on the long road to financial freedom if that is all you pay each month. Minimum payments are typically just a few percentage points of the outstanding balance, which usually just barely covers the interest payment.
Get into the habit of paying more than the minimum. It doesn’t matter if it is an extra $10 or $100 a month, but by paying more than the minimum, you will be applying that directly to the principal and can shave months or years off the debt. Not only do you pay the debt off quicker, but you’ll save a great deal of money as well.
Jeremy is the author of the personal finance blog Generation X Finance, which aims to help a unique generation achieve financial independence. Jeremy also writes for the Financial Planning topic over at About.com. He currently works as a retirement plan specialist with a focus on employer-sponsored plans.