Debt Reduction Strategies

Whether you’re making a long-term plan for your budget or you just want to reduce credit card debt to improve your finances, using a solid debt reduction strategy can help maximize the return on your efforts. This allows you to derive the greatest benefit from the time, money, and effort you put into reducing your debt. There are several different debt reduction strategies you can choose from based on your needs and your situation.

If you want to make a plan to reduce your debt or you need help coming up with a long-term budget strategy that manages your debt more successfully, call us at 1-800-990-9838 to speak with a certified credit counselor.

 

Debt reduction strategy #1: The high-interest debt method

With this debt reduction strategy, you focus your efforts on paying off credit card debts with the highest interest rates first. This helps reduce the speed at which your debts accumulate, because high interest rate credit cards accrue interest faster than low interest credit cards. This way, you’re not building up debt with interest charges just as fast as you’re paying it off.

Here is how the high-interest debt reduction strategy works:

  1. Create a monthly budget or streamline your existing budget to free up as much money as possible to pay off debt.
  2. Make sure to pay your bills, plus all of the minimum payments on all your other credit cards.
  3. Put all the extra money you freed up in your budget towards paying off your credit card with the highest interest rate. Continue paying as much money as possible until this debt is paid off completely.
  4. Once that debt is paid off, move on to the credit card with the next highest interest rate.
  5. Repeat this process until you have all your debts paid off.

 

Debt reduction strategy #2: The snowball technique

While the first strategy may be the most efficient way to reduce your debt, it can also seem daunting if your highest interest rate credit card has a high balance. If you don’t feel like you can make fast enough progress using the high interest method, you may wish to try the snowball technique. This works in a similar way to the first strategy, but it starts with your smallest debt owed to allow you to build momentum—like a snowball rolling down hill gains in speed and size.

Here’s how the snowball technique works:

  1. Follow Steps 1 and 2 above.
  2. Put all the extra money in your monthly budget towards paying off your credit card with the smallest debt owed.
  3. Once that debt is paid, you’ll have even more money available to pay off your next smallest credit card balance, and so on until you have enough momentum to tackle your largest debts.

 

Long-term credit card fixed payment strategy

The two strategies provided above are great if you currently have too much credit card debt and need to reduce your debt as efficiently as possible, but what if you simply want a strategy to avoid building up too much debt in the first place?  This is where a fixed payment credit card payment strategy can be a vital part of an effective financial plan. In a fixed payment strategy, you don’t stop at paying just the minimum payments on all your credit card bills. Instead, you commit to a fixed payment for each credit card no matter what your bill says—unless, of course, you have a zero balance!

Basically using a fixed payment strategy to pay off credit card debt can save you both time and money in paying off your debts. You can dramatically reduce the time it takes to pay off your debt, which in turn reduces the amount of time the debt has to accumulate interest with each passing month.

Consider this example:

You make a $5,000 purchase on your credit card at an 18% APR interest rate.

  • Your minimum payment is calculated as 2% of your balance, which means your first minimum payment will be $100, but the minimum payments in the months after would be less and less as you decrease the balance owed.
  • Instead of just paying the minimum amounts due each month, you commit to paying $100 every time until the bill is paid off.
  • Paying this fixed payment, you will pay off your debt in 94 months and pay $4311.18 in interest—as opposed to paying the debt off in 472 months with $13,396.73. You just saved over $9,000 and more than 3 decades of paying off your debt. 

    The more money you can put towards making fixed payments, the less time and money your debts will cost you. With just $100 extra dollars for a $200 fixed payment, you pay off the same $5000 debt in 32 months and reduce the interest paid to $1,313.96.