Creating a Debt Reduction Plan

It is far easier to get into debt than to get yourself out of debt. To help you handle your debt problems you will need to create an effective debt reduction plan. Too much debt can be a burden that will negatively affect your credit score and affect your ability to access cheap loans. Here are just some simple steps that you can use to create and implement a debt reduction plan.

Find Out Your Situation

Before you begin to look for a way out of your situation you will need to first analyze your present problems. Calculate all the debts you are presently owing to all your creditors including credit card companies, mortgage companies and others. Next it helps to find out what your credit score is. You can request your credit score report and go through it to ensure that no errors were made. Your credit score is directly affected by your debt to income ratio, so it’s important to understand how many debts you have, how much money they represent and where the debt comes from. Credit card company and bank debts tend to do the most harm to your credit score, while debts to utility companies or other firms will vary in their impact depending on how aggressive the company is about collections.

Get Organized

After getting your list of debts written out, you will need to also list all your income sources. List all your income and the times of the month when you get them. Next, list your expenses beginning with the constant expenses such as insurance, loans and utilities. Now you will need to list out other expenses such as groceries, gas and entertainment. Be careful about variable expenses like groceries or gas. People often reduce the amount they report because they want to feel more frugal, but you can’t create a good plan unless you are honest with yourself. If you see that groceries cost more in some months than in others, then use the highest, “worst case scenario” amount, not the lower amount.

Start Calling

Now that you have a clearer list of your income, expenses and debts you can begin working to reduce the debts. Call your creditors such as credit card companies and mortgages and tell them that you will need help to pay off your debts. You will be surprised to learn that most of these finance companies have special programs to help people pay off their debt. These leniency plans may include reduced payments, payoff plans, and reduced interest plans. You have nothing to lose from asking about such plans so call them and ask for financial assistance to pay off your debts easier. These steps may require that you complete lots of forms and provide additional information (paystubs, tax returns), but the work will likely pay off in reduced debts or lower interests rates. If you are currently out of work or in school, then there are probably additional programs that you qualify for. Make sure to ask about this when requesting help.

Reduce Your Expenses

The next step is to reduce your monthly expenses. Check your cable, phone, internet and cell phone plans to find out if you can get on cheaper plans. Go through your grocery list and find out what you can cut back on. Also check through what you spend on entertainment, eating out or renting DVDs. By cutting back on several things that you can do without, you can save more money to service your debts. For extra savings, look at quarterly or occasional expenses like travel or bank fees. You may be able to save more money by avoiding overdraft fees or by ordering cheap checks online.

Create a Plan and Stick to It

Create a plan to steadily pay off your debts and keep your monthly expenses low. Stick to the plan. Pay off the minimum required to service the debt each month apart from your lowest debt. For the lowest debt, you should pay off as much as you can to pay it off as fast as possible. All the money saved from cutting down your expenses should be channeled to servicing your smallest debt. Once you clear off the smallest debt, start concentrating on the next smallest debt.

Use Your Tax Return to Clear a Big Debt

Many people think of their tax return as “free money” but the truth is that this is a valuable source of income and shouldn’t be squandered. When you get your tax return, take a little for yourself but make sure that the lion’s share of it goes toward clearing a debt. If you think strategically about using this money, then you should be able to wipe 1 or 2 debts faster than with just your normal debt payments.

Bonus Tip:

All debts are not created equal. Student loans generally have lower interest rates than car loan or credit card debt. Older debts will have less impact on creditworthiness than those in the last 2-5 years. You should ideally focus on paying the biggest debts off first, but if you can clear several small debts then this is not a bad idea. Reducing the number of creditors can be an effective way of improving your credit score.