Manage Your Debt in 5 Easy Steps

Having too much consumer debt can harm your credit score, limit your financial freedom, and cause daily stress. If you are overwhelmed by high credit card balances, you’re not alone.

While the number of American households carrying credit card debt has decreased since 2009, those that do have consumer debt have an average credit card balance upwards of $15,000, and the balances are increasing.  

If you don’t like the landscape you’re living in, you can change it! If you are among the more than 30 percent of Americans with consumer debt, these steps may help you manage and reduce your debt. This enables you to improve your credit score, gives you more financial freedom, and reduces stress in your daily life.

Managing your consumer debt is an art. In a culture of convenience and speed, it takes creativity and commitment to craft the lifestyle you want, but getting started is easier than you may think. All you need is a pen and a single piece of paper. Are you ready?

1. Paint a full financial picture of today.
Take a clean sheet of paper, and on one side, list every financial obligation you have. For each, you will want to note the total balance due, interest rate, and minimum monthly payment. Then, go online and pull your free, annual credit report. If there are any delinquent accounts indicated on your credit report, add them to your list.

This is a picture of your financial situation as it is today. How does it look?

2. Trim around the edges.
With a full picture of your current situation, you can now trim your spending on these items to free up extra money each month. Where can you cut spending? Make changes on this side of the page now. Total the amount you need each month to live on, and subtract it from your monthly income. If you are in the red, repeat step two until you are in the green with cash left over. You do have debt to pay, after all.

3. Stay within the frame.
Turn the paper over to its blank side. On the top half of this page, list and add up your monthly expenses — both the necessary items and the non-essentials that survived step two. Do not include your credit card debt. Write the amount you have in freed-up cash underneath this list. Leave room on this page for step four!

4. Don’t forget any detail.
Armed with your freed-up cash, pick up the phone and call your creditors. Let each creditor know you want to pay off your balance, but need help. Ask for a reduced interest rate, or if the account is in collections, negotiate a settlement. Take whatever offers you can get that are better than the situation you are in. Even a small reduction in an interest rate will improve your payments and impact the final amount you pay on that account. List your new totals and payment plans on the bottom half of the page.

5. Repaint your canvas.
The final step is to decide how to pay off your consumer debt! There are two ways commonly used to pay down debt. Both honor the monthly budget you’ve created and use only the freed-up cash available to you.

The first way to reduce your debt is to take the cash you freed up and pay off the account that has the highest interest rate, while making minimum monthly payments to the other creditors. Then, pay off the account with the next-highest interest rate. Eliminating your high-interest accounts first minimizes the total amount you pay to clear all your debt.

The second way to pay down debt is to focus your extra cash on the smallest balance first and make minimum monthly payments to the other creditors. Once the smallest account is paid off, add that payment to the minimum payment you are making on the second-smallest balance. When that account is paid off, apply the combined monthly payments for the first two balances to the third-smallest balance, and so on. Think of it like a snowball of payments. This approach may cost you more in the long run because it does not factor in interest rates, but it more quickly reduces the number of outstanding accounts you have, which can feel pretty great.

Whichever method you choose, number your accounts in the order in which you plan to pay them down.

Now that you know how much money you need to live on, how much you owe, how much cash you have left each month to pay down debt, and a plan for paying down your debt going forward, you have painted a brand new picture.

What does your financial future look like?

Jennifer Bonessi is a member of the DailyWorth Connect program. Read more about the program here.


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