You have likely come across ads on TV, radio or the Internet promising quick credit card debt relief or promoting plans guaranteed to help you get out of debt in the “fastest” way possible.
An unfortunate truth is that some of these programs are scams. The good news is that a few like National Debt Relief are reputable and legitimate. They can be a lifesaver by offering a way out of debt even if you can’t afford to pay back the full amount.
Do It Yourself Debt Reduction
Did you know that with a little planning and dedication, you can actually deal with your own debt reduction? And when you do it yourself (DIY), it’s not only effective, but it’s also free.
There is no need to pay a debt counselor or debt consolidation agency if you think you can take on the responsibility yourself. It does take work and a lot of negotiating, which could make some people uncomfortable.
By following the five steps below, you can become your own advocate.
1. Determine where you stand
The first step is to view the big picture regarding your debts.
Get a piece of paper or a spreadsheet program like Microsoft Excel or Google Sheets and make a list of your debts, their balances, interest rates and their monthly minimum payments.
Be sure to include everything like any personal loans, auto loans, credit cards, payday loans, etc. If any of your credit cards have annual fees, include them too.
However, you don’t need to add student loans or your mortgage since they typically have low APR’s and relatively long terms. It’s best to concentrate on paying off your other balances first.
2. Review your monthly budget
Be sure to examine your monthly expenses if you have a budget. If you don’t, it’s important that you create one as soon as possible.
Jot down your net income (after taxes). Then subtract your monthly rent or mortgage payment along with other regular monthly expenses such as insurance, utilities, groceries, childcare and student loan payments.
Subtract your monthly expenses from your net monthly income to determine if you bring home more than you spend. If you have money left over, experts recommend that you put it towards your debts. But what if the amount is too small to make a serious dent?
In this case, look for ways to reduce your monthly spending such as cutting streaming services, carpooling to work, dropping that health club membership and cutting down on your grocery bill.
3. Create a plan
Now that you know where you stand financially, the next step is to create a debt payment plan. The easiest way to do this is by filling in the chart below using the information you created in steps 1 and 2. Any leftover money should be used to pay your creditors.
Example: Your plan
Monthly income after taxes $3800 $ ________
Minimum debt payments $1700 $ ________
Monthly expenses $600 $ ________
Amount remaining to pay
down the debt with the highest
interest rate and balance = $1500 $ ________
To save the most money, first focus on paying off the debt with the highest interest rate and balance, which is referred to as the avalanche method.
Now move on to the second largest expense. Make sure you don’t add any new charges to your credit cards during this process. And try to find ways every month to increase the amount you put toward your debt.
4. Begin negotiations
While you begin implementing your debt reduction plan from the previous step, start negotiating with your credit card companies. You can ask to get your interest rates reduced or work out a settlement for less than you owe.
You can also consider transferring some of your credit card balances to a new card with a lower interest rate. The ideal scenario is if you qualify for one of the 0% interest rate balance transfers. By doing so, you could have as long as 18 months to pay the balance interest-free. This could save you a lot of money in the long run.
5. Stick to your debt reduction plan
The amount you put toward the most expensive debt can vary from month to month. However, you should try to put as much as possible towards your creditors on a consistent basis.
The simplest way to do this is by signing up for a direct deposit payment system. You won’t miss the money or be tempted to spend it if it never passes through your hands.
Most Frequently Asked Questions about debt reduction
Q. What is the snowball debt reduction plan?
A. The snowball debt reduction plan was developed by financial guru Dave Ramsey and entails paying off your debt in order of smallest to largest.
First, list your debts in order from the lowest to the one with the highest amount owed. Next, focus all your efforts on paying off the smallest balance, while making at least the minimum payments on your other debts to avoid late fees and penalties.
Once you get that first debt paid off, move on to the one with the second lowest balance and so forth. The idea behind this plan is that paying off the debt with the lowest balance will be relatively easy and provide the momentum needed to stick with the program.
Q. How to create a debt reduction plan in Excel?
A. To start, make a spreadsheet with four columns in the top row as illustrated in step 1. Then go down a row and begin filling in the applicable information.
You can then use Excel’s formulas to play “what if” games or to reorder your debts using the snowball method.
Q. How to accelerate debt reduction?
A. Increase the amount you pay toward your debts each month per the table shown in step 3.
For example, you might be able to trim your living expenses so that you have more money to pay down your balances.
Q. How do debt settlement companies work?
A. If you choose to work with one, you will likely stop paying your lenders. Instead, you will transfer a set amount each month to an escrow-type account in your name.
Once enough money has accumulated to resolve one of your debts, the settlement company will contact you. If you accept the offer, they will ask you to release enough funds from your account to cover it. This process will continue until all your debts have been addressed or repaid, which can take as little as 24 to 48 months, depending on how much you owe.
Q. Are debt settlement companies legitimate?
A. There are definitely legitimate debt settlement companies, especially since the government cracked down on scammers. The good ones never charge an upfront fee—it is illegal—and make no grandiose promises.
It is important to read a company’s consumer reviews and search for any red flags. Also check with the Better Business Bureau to see the ranking and any filed complaints.