7 proven ways to reduce or even eliminate your debt

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The worst sensation is the one you get when you see how much you owe on your credit card bill and open it. We’re feeling that more frequently as a result of people taking on more debt. One of the three credit bureaus, Experian, estimates that the average amount of unsecured debt held by consumers is $27,091, up 16% from 2021. This debt includes credit card and personal loan balances.

If you merely make the minimal payment due, you may find yourself thousands of dollars overcharged and in debt for years or even decades. However, by employing these debt reduction strategies, you can expedite your repayment and lessen the stress associated with money:

1. Give more money than is required

When you check your credit card bill, you’ll see that the company has provided you with the amount of your statement balance as well as the minimum payment required to maintain the good standing of your account. If your account amount was $5,000, your minimum payment would be between $100 and $200 per month. Typically, minimum payments range from 2% to 4% of the account balance.

“That debt balance is not going down anytime soon if you’re not making significantly more than the minimum monthly payment,” issued a warning from LaDonna Cook, a manager of program performance at the nonprofit credit counseling organization Greenpath Financial Wellness.

You must make bigger payments to save money and pay off your debt more quickly. Let’s take an example where you have a credit card debt of $5,000 and the annual percentage rate (APR) is 22%. A minimum payment of $150, or 3% of your debt, is required. Due to the high-interest rate, paying the minimal amount would require 52 months to pay off the balance, meaning you would end up paying $7,798.05 in total.

You could pay off your loan 18 months sooner and only have to return $6,749.88 if you raised your monthly amount to $200, a $50 increase. You may save more than $1,000 by making larger payments.

2. Make use of the debt avalanche’s power

The debt avalanche repayment method is the most economical way to manage your debt if you have several credit accounts with outstanding balances. Using this method, you make a list of all your accounts and arrange them in ascending order of APR. Maintain your minimum payment obligations on all accounts, allocating any excess funds to the account with the greatest annual percentage rate.

Continue using this method until you have paid off all of your debts, rolling over the amount owed on the highest interest bill onto the account with the next-highest rate. You will save more money and pay off debt sooner than you would with other methods since this technique starts with the most costly debt.

3. Pay off your high-interest debt

When data was last available in February 2024, the average annual percentage rate (APR) for credit cards with interest was more than 22%. Making progress on your debt repayment path can be excruciatingly slow with such a high rate.

Using a balance transfer to shift your debt to a credit card with a promotional 0% APR is one approach to expedite the process. With some cards, you can pay off your debt interest-free for up to 18 months during which time there is no annual percentage rate.

To transfer your balance, you will normally have to pay a fee. Typically, these costs range from 3% to 5% of the transferred amount. Generally speaking, to be eligible for a card with an introductory 0% APR, your credit must be outstanding to excellent.

4. Apply for a loan to consolidate your debts

A debt consolidation loan could be a helpful tool for you to save money and pay off your amounts if you have good to excellent credit, or if you can get a friend or relative with strong credit to co-sign a loan with you.

Unsecured personal loans known as debt consolidation loans are intended to settle existing high-interest debt. When compared to credit cards, personal loans for borrowers with good credit typically offer lower interest rates. This means that a larger portion of your payment goes toward principal rather than interest, possibly saving you a significant sum of money.

But exercise caution: debt consolidation loans only become effective if you maintain discipline and a laser-like focus on paying off your debt.”A common occurrence I’ve observed is when individuals obtain a consolidation loan in proportion to their debt load,” stated Kim Cole, a community engagement manager at Navicore Solutions, a nonprofit credit counseling organization. Their balance is now zero. They also haven’t altered their habits, so even if they’re positive they won’t use the cards, they wind up piling debt back onto them. Along with their new loan payment, they also have credit card debt.

5. Get professional help

Consult a non-profit credit counselor if your debt is too much for you to manage and you are having trouble making your payments. They will look at your spending plan and debt, and then collaborate with you to come up with solutions.

You can have someone look at your financial status and tell you what your options are; the assessment is typically 100% free, according to Cook. “The analysis gives the consumer a way ahead, and there tend to be multiple solutions.”

A debt management plan (DMP) is one choice. The credit counselor contacts your creditors on your behalf under a DMP to negotiate interest rate reductions. Due to their partnerships with numerous large banks and credit unions, nonprofit counseling organizations are frequently able to drastically reduce your rates and fees, which will help you manage your debt. The agency receives a single payment from you, which it then uses to pay your creditors.

The advantages of a DMP can extend beyond financial savings and be quite significant. According to Cole, “the creditor will typically start to report that debt as current, which means no late fees, once the client makes three payments.” “There are no more over-the-limit fees or collection agency calls if there is an over-the-limit situation.”

You might be debt-free in three to five years if you follow the DMP. But while you’re in the DMP, you can’t create new credit lines and you have to give up using your credit cards.

Both the Financial Counseling Association of America and the National Foundation for Credit Counseling maintain listings of reputable credit counseling institutions.

6. Use your windfalls

You might get a tax refund, a bonus from work, or an unexpected gift from a loved one throughout the year. You could save money on interest and accelerate your debt repayment if you use that windfall as a lump sum payment.

For instance, during the 2024 tax filing season, the average refund was more than $3,000. You would pay off $5,000 in credit card debt at a 22% annual percentage rate in three years and save nearly $2,400 in interest if you used your refund as a lump sum payment.

7. Consider debt settlement

When everything else fails, debt settlement is the last alternative for managing overwhelming debt. Debt settlement firms will get in touch with your creditors and try to get them to agree to settle your debt for less than you owe. Depending on your circumstances, this might result in a 50% reduction in your debt.

Debt settlement is dangerous, though. Since you must cease making payments as part of the negotiations, some creditors may not cooperate with debt settlement companies, which can seriously damage your credit. Furthermore, debt settlement firms are profit-driven businesses that take a cut of the debt you enroll. The charge may be as much as 25% of your balance, depending on the firm.

The Takeaway 

Debt reduction may seem like a difficult but necessary undertaking. In addition to saving you money, paying off your debt can relieve a significant amount of stress. Effective money management strategies include paying more than the minimum, consolidating your debt, looking into government debt relief programs, or getting expert assistance. Seek assistance from seasoned experts by visiting the top debt relief firms.

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