6 Methods for Decreasing Your Household Debt

Whether you are faced with phone calls from creditors or simply recognize that your household budget is out of control, the goal of decreasing debt and increasing savings is worthwhile. Plenty of consumers simply ignore their mounting debt crisis rather than take proactive steps to get control of their money.

The reasons for debt problems are completely individual. For some consumers, financial instability is a by-product of illness, job loss or divorce. For others, money problems come from chronic overspending or even a simple financial error of paying too much for one big-ticket item such as a car, a home or college tuition.

Why Am I In Debt?

Three important points need to be recognized by everyone who faces debt problems:

  • You must fully understand your debt: how much you have and what your monthly obligations are.
  • If the debt problems occurred because of your mistakes rather than because of a job loss or some outside pressure, then acknowledge your errors and commit to yourself that you will not repeat them.
  • Realize that financial problems can be overcome. The world is full of people who have faced the same situation as you--on a larger or smaller scale--and have gone on to create a financially stable life.

How Can I Decrease My Debt?

1. Develop a budget. Start by listing your income from every source, then list your fixed expenses (mortgage payments, car payments, insurance, etc.) and then list variable expenses such as clothing and entertainment. Once you have your financial life on paper, you can decide how to manage your money and decrease your expenses or increase your income.

Above all, avoid incurring new debts--especially for items which do not retain their value.

2. Debt consolidation. If you have some equity in your home, you may be able to use it to consolidate debt. For instance, you may consider a home equity loan or refinancing your home as a way to decrease your monthly housing expenses. If you find a low-cost refinance, you can reduce your home loan payments and use the savings to increase your debt payments, eventually decreasing your debt on higher-interest consumer loans.

If you have enough equity in your home, you may qualify for a cash-out refinance. In this type of home refinance, you can pay off other debt with the proceeds of the cash-out portion of the loan. Your monthly home loan payments might either increase or decrease, but the interest paid on a mortgage is usually tax-deductible and considerably lower than credit card interest rates.

In addition, because your mortgage payments are typically stretched over as much as 30 years, your monthly payments on debt consolidated into your mortgage loan will likely drop somewhat--enabling you to pay extra and eliminate them all even faster, via an accelerated debt paydown.

3. Accelerated paydown. Develop your own plan for decreasing your debt faster. Either pay off the smallest debt first, then use the money you were paying for that debt and apply it to the next largest debt, or pay off the debt with the highest interest rate first, then proceed to lower rate debts. Either method works as long as you are disciplined and continue to pay the maximum possible amount on your debt every month.

4. Contact your creditors. If you are having difficulty making your monthly payments, contact your creditors and ask them for a reduced interest rate or a modified payment plan. If your credit is good, you can ask your creditors for a lower interest rate even if you are not having trouble paying your bills. The lower your interest rate, the faster you will pay off your balance.

You can apply for a credit card with a lower interest rate, but be sure you are not tricked into paying too much for a balance transfer or that you will be tempted to use additional credit that you can't afford.

5. Credit counseling. If you are still having trouble sticking to a budget or are unsuccessful in dealing with your creditors, you may want to work with a non-profit credit counselor. You can get a referral for a credit counselor through the National Foundation for Credit Counseling (NFCC). Be extremely wary about so-called credit counselors who charge an upfront fee; most such legitimate services are non-profit.

6. Debt management plans. Finally, a credit counselor may recommend that you enroll in a plan that requires you to make one payment, with the credit counselor paying bills directly to your creditors. Again, always scrutinize such companies very carefully--you will be entrusting not only your credit, but also your monthly payments and possibly your home and other assets to them.

No matter which method you use, consider refinancing as one potential part of your financial management plan. Take responsibility now, and work to build a better--and less financially stressful--life.