Debt Reduction Options

If you are facing a mountain of debt, there are several things that you can do to try and reduce your debt problems

Don’t Panic.

Do you remember why the Hitch Hiker’s Guide to the Galaxy is the most popular book in the galaxy - because it has the reassuring words ‘Don’t panic’ written in bold letters on the front. Whatever your financial situation don’t let the problem of debt dominate your life. There are several options which will enable you to work through your financial situations.

Understand Your Situation

It is important not to sweep all your debts and bill reminders under the carpet hoping they will dissappear. Keep track of every bill, debt and overdraft and work out which is the most pressing to reduce first.

Optimise Your Debt.

Debt is not good, but some debt is more expensive to service than others. Prioritise your debt and seek to reduce the most costly debt first. If you are paying credit card debt at greater than 15% this is a very expensive way of borrowing. Seek to reduce the the most costly debt first. If possible you can consolidate debt into the lowest interest paying account. If you consolidate your debt against the value of your house, be aware that you may put your home at risk. Nevertheless you may see your interest fall from 17% to 5%. This can be very helpful, if you use the smaller interest payments to reduce your debt capital.

The Snowball Effect.

It is important to understand the importance of paying off debt early. If debt is allowed to grow the total interest cost will escalate due to something known as the snowball effect. If you are charged interest on your debt, it means that paying the minimum monthly repayment only goes to paying the interest charges and does nothing to reduce the capital debt. Therefore, even if you don’t add to your debt by spending more, the total debt can continue to increase because you start paying interest on the interest charges. If you are not careful, the debt and interest can become unmanageable, even if the initial debt was relatively small. However, if you make additional repayment to your debts. Then you not only reduce the capital but future interest payments on the debt. Make it a priority to pay off a bigger chunk of debt each month. Make these extra debt reduction payments your highest priority in your monthly expenditure. Over time you will save considerably more than your extra spending.

Use Savings.

Sometimes we can help our debt by doing simple things first. If we have any savings in a current account earning a pitiful interest of 1% APR, then this money would be much better used reducing our debt. Look to see whether your bank can offer you any interest free overdraft facility. If they do, use it to reduce your debt, taking care never to go over your authorised overdraft limit.

Use 0% interest facilities on Credit Cards

If credit cards are your source of debt, I would hesitate to recommend this. If your debt is caused by compulsive overspending on plastic, you may be better off tearing them up and using cash. However, if you are careful with credit cards, you can take advantage of credit cards which offer 0% interest on balance transfers for 6 to 12 months. Using 0% balance transfers on credit cards

See also:

• Effective but Painful ways to reduce debt