We all want to achieve debt reduction. In our society, the use of credit is part of the norm. In the past, being in debt is a taboo. But now, when you use credit cards, it is a status symbol. People who use their credit card feels like they have an extension of their wallet. It makes them feel wealthier than what they are really worth.
This is probably why a lot of people are in debt and continue to accumulate more of it. According to the data published in an article on CNBC.com, the household debt rose to 1.1%. It is now $12.25 trillion. This is believed to be the biggest increase since the Great Recession happened.
Obviously, a lot of consumers are in need of a great debt reduction strategy. The truth is, it is not as difficult as you think. And you do not really need a professional to help you with it. You can do this yourself through 10 simple tasks that are not really that difficult to follow.
10 tasks that will help you reduce debts
Here are the 10 tasks that will help you succeed at reducing your debts.
Accept responsibility for the debt.
Start by accepting that the debt is your responsibility. You have to remember that this debt was your own doing. Unless you were a victim of identity theft, you need to own up to this debt. Even if you were forced into debt because of an emergency situation, it is still your own fault that you are not ready with an emergency fund. It would be easier for you to move forward and do something about the debt if you just accept that it is your responsibility and thus your problem to solve and pay. Stop playing the blame game and pointing fingers.
Recognize the problem.
While the debt seems to be the primary problem, you need to look at the root cause. What led you into so much debt? Is it your irresponsible use of credit cards? Or is it because you failed to save up for an emergency fund? It is very important that you think about why you are in debt in the first place. You need to solve this problem while you are working on debt reduction. If you fail to address the root cause of the debt, you will find yourself in the same situation again.
Freeze your credit cards.
If you want to reduce your debts, you need to start adding into it. That means freezing your credit cards. Take note that we do not advise you to close it. Just freeze it temporarily so you will not be tempted to use this while you are going through a debt relief program. Once you have paid off your balance, only then should you think about using your cards once more.
Conduct regular financial meetings with the family.
When we say family, that means you need to include your kids. Some parents would like to shield their kids from their financial worries. This is usually a mistake. You do not want to give them a burden but you need to let them know if you are in a financial crisis. They need to understand why you have to cut back on your expenses – that will avoid any form of resentment within them. According to the research published on ScienceDaily.com, children with parents who have unsecured debts are prone to behavioral problems compared to those whose parents owe student loans or mortgage. Apparently, higher levels of unsecured debts cause anxiety in the home. That can affect your kids. You have to make sure they are in the loop so they can also give their parents support. You may be surprised at how children can motivate parents to be better at managing their finances.
Create a new budget.
As you discuss your finances with the family, that is a good time to talk about your budget too. There may be changes that have to happen if you want to succeed in your debt reduction plan. Talk about the expenses that you can cut back on. There may be suggestions that you have overlooked. When you create the budget plan together, it would be easier for your family to stick to it.
Fully understand the role of interest on your debt.
It is very important to educate yourself about the debt that you owe. That includes your interest rate. This has an important role in increasing or decreasing your monthly payments. For instance, when you know your credit card interest rate, you will recognize which of them is higher than the usual and it should prompt you to negotiate with your creditors for a lower rate. You should also learn how to use a good credit rating to your advantage – specifically when you are negotiating for a lower interest rate.
Be cautious of the small fees.
Some people do not mind the small fees that they pay on their debts – that is a mistake. These small payments add up in time. You want to make sure that you understand all of the payments and charges. There may be a way to waive them so you get to save money in the process. If you have to negotiate a lower rate with the lender or creditor, make sure you include these fees.
Learn how to consolidate your debts.
According to the data from StatisticBrain.com, Americans own an average of 4 credit cards. If you carry a balance on all these accounts, managing your debt payments could be troublesome. You might miss out on a payment or you can fail to monitor the fees and charges being billed to you. To make debt reduction easier, you might want to consolidate your debts. There are a couple of options available. You can choose to get a personal loan to consolidate your multiple credit card accounts. Or you can use balance transfer. Debt management employs the help of a credit counselor to negotiate with your creditors on your behalf. Debt settlement is also one way to consolidate and reduce your debts at the same time. Analyze your financial situation so you can choose the right consolidation strategy to suit your debt relief purpose.
Get a side job.
Obviously, if you want to be aggressive in paying down your debts, you need to increase your income. One way to do that is to get a side job. You may argue that you can always cut back on expenses – while that is true, it will be limited. You can only slash a portion of what you are spending. If you opt to earn more, you can work as hard as you can to get as much increase from your income.
Sell what you do not need.
Another option to earn more money for debt payments is to sell what you do not need. Declutter your life and see what you can sell from your house. This will help you organize your household and at the same time, earn extra for additional debt payments.
Habits you need while reducing your debts
Debt reduction, while it does not take a rocket scientist to figure out how to do it, does not happen overnight. It involves consistent activities that are aligned with smart financial management. You need to develop the right habits that will not only make your debt relief efforts successful but will also keep you from committing the same mistakes again. Here are the important habits that you need to implement while you are reducing your debts.
- Keep track of expenses. You need to know where your money is going because some of your expenses might be compromising your budget already. Make sure you lower unnecessary spending and keep your finances under control.
- Pay bills on time. Do not waste your money on late penalties. Pay your bills on time so you will not get into trouble – specifically with your credit report.
- Control your spending. Self-control is an important quality if you want to be successful at debt reduction. You need to control your spending and to consistently pay off your debts each month. Try not to slip and make unnecessary purchases if you do not have to.
- Consult your budget always. It is also important that you keep your eye on the budget. All your financial decisions should always go through the budget plan that you have created with your family. If you have trouble sticking to your budget, there may be something wrong with it. You have to analyze your budget and revise it according to your financial priorities.
- Get rid of one or two bad habits. It also helps to eliminate the bad habits that got you into debt trouble in the first place. If it is your impulsive buying tendencies, you need to correct this. You should also consider the literal bad habits like vices. Cutting back on alcohol, smoking, and other bad vices will not only help you financially but also health-wise.
- Be honest about your financial transactions. Finally, you need to make a commitment to be honest about your finances at all times. If you cannot afford something, then do not pretend that you can just to impress someone else. Also, you need to be honest with your spouse or partner about your financial transactions. If they know your goals, they can keep you in check so you can make the right choices about your finances.
Sometimes, people are hesitant to pay off their debts because they know that they need to save too. Both of these financial actions are important – saving and paying off debts. However, we do not always have the financial capabilities to do both at the same time. What do you do then? What should you prioritize?
Common questions about debt reduction
Question: What is debt reduction?
Answer: This is a type of debt relief strategy wherein you focus on reducing your debt situation through negotiations. Sometimes, debt reduction is also called debt settlement.
Question: What is a debt reduction plan?
Answer: This is when you negotiate with your creditors and lenders to allow you to pay only a portion of your debts – as long as it is done with a lump sum amount. Whatever you cannot pay with this lump sum will be forgiven.
Question: What are debt reduction programs?
Answer: Apart from debt settlement, you can also use debt consolidation – but this will not really help you reduce your principal balance. It can, however, help you reduce your interest payments through a new loan with a lower interest rate.
Question: How does debt reduction affect my credit score?
Answer: If you use debt settlement, your credit score will be affected – but only temporarily. As soon as your debts are forgiven, you can immediately start working on improving your credit records by using credit wisely.
Question: How do I negotiate for a debt reduction?
Answer: You can negotiate by telling the creditor or lender that you are in a bad financial situation. If they cannot help reduce your debts, you may be forced to file for bankruptcy. That usually gets them to listen to your settlement offer.