Six Steps to Reduce Debt


Cutting a credit cardBeing buried under debt puts your future at risk by making it tough to save enough for retirement or build a rainy day fund. Learning how to manage your debt while still being able to save for short and long term goals is critical to your overall financial health.

Signs you may have too much debt

  • Your debt payments (including mortgage, car loan or lease, credit card balances, and other debt) are more than 35% of your gross income
  • You’re paying your monthly bills late on a regular basis
  • You can only make the minimum payment on your credit cards bills
  • You’ve reached the available credit limits on your credit cards
  • You’ve recently been denied credit due to black marks on your credit reports

If you’re concerned about your debt situation, these steps can help you on your path to being debt free.

1. Create a budget

You may already have a budget in place, but if you see your debt increasing, now is the time to revisit it to see exactly where you’re spending more than you had planned.

How to get help with debt problems

If you're paying bills late and find yourself becoming increasingly concerned about personal debt, consider seeking the services of a trained, certified, nonprofit credit counselor. A counselor can offer free or low-cost guidance on managing your money, working through financial problems and developing a personalized plan to help prevent such problems from happening in the future.

The National Foundation for Credit Counseling (NFCC), the nation's largest nonprofit credit counseling network, can put you in touch with one of its nearly 100 Member Agencies in more than 800 offices throughout the US. Call the NFCC at 800 388-2227 or visit  for more.1

1We do not endorse nor are we affiliated with this website and are providing it as an example of a resource from which you can obtain information.

Creating a budget can help you:

  • See where your money is going
  • Avoid overspending
  • Set aside money for long-term savings, like retirement

If you need additional help mapping out a plan to reach your financial goals, it may be a good idea to seek the advice of a financial planner.

2. Know what you owe

It helps to know exactly what you’re facing when reducing your debt. Gather all your latest credit card statements, loan papers and your bank statements.
Write down all your debts, the amount you owe on each account, the interest rate being charged and the minimum payment currently due each period. Add up the combined total to get a full understanding of how much debt you have.

You may not like what you find, but it will serve as motivation to determine your next steps.

3. Pay more than the minimum

Paying off a high-cost debt takes a long time if you pay just the minimum amount due. In addition, you could end up paying more because of accumulating interest charges.

The example at right shows how much you could end up paying for a sofa by only paying the minimum on your credit card.

4. Ask your credit card company for a lower rate

Call your credit card company or lender and ask them if they will lower your interest rate. If you're a good customer with a strong credit history, many companies will honor your request rather than risk losing you to the competition.

If you're carrying a high balance on a card, a lower rate on that card could save you hundreds or even thousands of dollars in interest charges over time.


The Cost of Debt1

Example: Purchase of a sofa on a credit card.

Amount charged to credit card

$ 899
Interest rate 18%
Time to pay off if you make minimum payments only 6 years
Total amount paid if you make minimum payments only $ 1,507

Total interest if you make minimum payments only

$ 608

    1Assumes the credit card has a zero balance when sofa is purchased and it's used only for that purchase

5. Dip into savings…but only temporarily

If you’re paying higher interest on your debt than you’re earning on savings, consider using at least some of your savings to reduce your debt. You might decide it doesn’t make sense to earn 1% on savings when you’re paying 18% interest on a credit card.

After you pay down your debt, set a goal to have enough savings in an emergency fund to cover three to six months of living expenses.

6. Make a plan

Now that you have a good idea of the steps to take to eliminate your debt, you can begin to improve your financial well being. Remember, that you don’t have to go it alone. Make sure to involve family members, spouses or partners who are also contributing to your financial goals. It’s important everyone does their part to manage the household budget.

Additional resources

You may also want to consider the help of a financial advisor, credit counselor or online budgeting software to help you track your spending and offer some ideas on how to find more ways to save. These resources can help you reach your goals by tracking your progress and making adjustments along the way.

Facing your debt is the first step and it can be the most challenging but once you’ve committed to a plan, you’ll be able to see the positive results of your efforts.

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